These sites don’t even tend to raise much capital, so not only do they not advertise much, but they do not spend much on IT expenditures, rent, office space, etc.  Let’s face it: the multiplier effect just isn’t what it used to be back in the day.  Before, companies raised boatloads of cash, but they reinvested in the economy.  Today, most companies don’t raise much; those who do are stingy with the proceeds.

While many of these sites tend to fizzle, a few do go on to experience strong growth in user acquisition and adoption.

Given the huge opportunity in online advertising, unlike their Web 1.0 brethren who sought to monetize their eyeballs via e-commerce, today’s crop of websites turn their backs and thumb their noses at e-commerce and instead adopt an online advertising strategy.

The problem is that as social media sites - either relying on user generated content of one form or another - advertisers shy away from spending money on these sites… despite the fact that they generate a lot of inventory, flooding the overall market with cheap, unsold inventory.

Meanwhile, these sites tend to turn to Google Ad Sense as a desperate stop gap measure to generate revenue.  Many don’t… adding insult to injury, these sites tend to pummel the click through rates (CTR) that Google leverages to generate more revenue… so as its monetization rates fall, Wall Street grows worried and punishes Google’s stock accordingly.

Google, in turn, focuses more on revenues and profitable deals, and it shies away from giving these sites attractive minimums to lock up their inventory.

If you repeat this cycle (Myspace, Digg, etc) a few times, you see that net-net: the effect is actually quite negative:

- VC money flowed to such social media sites
- Most did not generate material revenues to deserve follow up investment
- Few attracted exits
- Rarely did any of them spend much in terms of online marketing

Maybe this is why we are seeing some hiccups in growth rates?  After all, while online advertising growth rates remain buoyant relative to the morbid print, TV and radio rates… we are seeing a reduction in the velocity, no?  Forget social networking revenues, those are headed straight down the drain.

I don’t mean to be alarmist or anything, but I see this exhibitionist UGC/social media nonsense as the Achilles Heel of the Web… you know, sort of like the answer to “what led to the decline of western civilization online media”?