Social Network Ad Spending Keeps Rising

AUGUST 13, 2007


Debra Aho Williamson, Senior Analyst

Last week, News Corp. announced that Fox Interactive Media turned its first annual profit on revenue of $550 million. With an estimated 80% of FIM revenue coming from MySpace, that translates to about $440 million in MySpace revenue for the fiscal year, which ended June 30. Almost all of that comes from advertising.

To those who had their doubts about MySpace, News Corp. CEO Rupert Murdoch had this to say during the earnings call: "It wasn't so long ago — 24 months — when many said we were embarking on a fool's errand. In the 12 months prior to our acquiring MySpace, the site generated $23 million in revenue. Today, on the back of its durability and success, we are forecasting that MySpace alone will generate in excess of $800 million in revenue in fiscal '08."

eMarketer has projected that MySpace would generate $525 million in US ad revenue in calendar 2007 and $820 million in 2008. Both of those figures will likely rise when we issue our next social network ad spending forecast later this year.

Three factors will drive increased revenue for MySpace in the near term. It has begun beta-testing a new targeted advertising tool that will significantly increase CPMs. Parent Fox Interactive Media's deal with Google to supply search technology is providing increased revenue. Lastly, MySpace's international business has ramped up significantly.

At Facebook, which lately has stolen a lot of MySpace's thunder, revenue may also surpass our projection of $125 million in 2007. It now has 31 million active users, up from 8.9 million in September 2006, and generates 40 billion page views a month.

Clearly, its deal with Microsoft to sell banner advertising (reportedly contributing $200 million to Facebook's coffers through 2008) is a big revenue driver. (A flap last week over some banner ads appearing on the Facebook page of a British extreme-right-wing group will likely blow over.)

So, all is rosy in social networking, right? Well, not exactly. With banner ads and search deals plowing in a good chunk of revenue for these sites, what happens to the original promise of social network marketing: delivering a message to one person and having that person spread the message to his or her network? That part is still a work in progress.

Marketers are still grappling with how to measure the effectiveness of forming groups; as one commenter recently wrote on the Valleywag blog, "is simply joining a group really driving sales, profits, and metrics that actually matter?"

eMarketer projects that marketers will spend $900 million advertising on social networks in the US this year.

That figure will likely increase, at least in the near term, but if advertisers simply go for the low-hanging fruit of banners and search instead of reaching for the exponential effect of pass-along, much of the promise — and potential — of social networking will be lost.