Social Networking, So What?

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on 29 August 2007, 13:41
by Leah Messinger

Social network providers build highly engaging Web sites that have managed to rope in the majority of U.S. Internet users, but they still haven’t managed to find a way to turn those millions of users into a steady influx of greenbacks from advertisers.

That’s according to a report released Wednesday by IDC.

Karsten Weide, the IDC analyst who wrote the report, pointed out that despite their current status as tech media darlings, social networks are still a work in progress. “Few offerings generate an income that would be in a sensible relation to the media attention they receive,” wrote Mr. Weide.

By social networking, Mr. Weide refers to publishing sites, such as YouTube; destinations such as MySpace and LinkedIn; and service-oriented sites, such as Craigslist, Wikipedia, and Amazon.com

Mr. Weide predicts that over time the networks will settle on a business model that includes both subscriptions and e-commerce, but said brand advertising is the only approach that will bring in enough revenue to support a large social network. First, however, the networks must figure out how to get their advertising to scale and ease the concerns of advertisers who remain uncomfortable with the prospect that their ads will appear next to unpredictable user-generated content.

Though leading social network MySpace already focuses most of its money-making efforts on advertising—on its home page, through brand-specific campaigns, and through banner ads on profile pages—Mr. Weide said the Fox Interactive Media-owned company’s earnings pale next to those of tech companies in other sectors.

Rupert Murdoch, Chairman and CEO of News Corp., which owns the Fox properties, said earlier this month that Fox Interactive Media brought in an estimated $550 million in the last fiscal year. Mr. Weide pointed out that Microsoft’s Online Services Business earned $624 million in Q4 of last year alone.

Industry experts say Fox Interactive Media has had a difficult time selling ads for many MySpace pages because it simply has too much inventory. The head of one interactive ad agency said companies wanting to advertise on more coveted properties such as Fox Sports, often must agree to fill space on MySpace as well. Other MySpace inventory can sell for less than $0.10 per thousand views, according to the ad agency head.

Facebook trails far behind MySpace in both the size of its user base and the revenue it brings in, but it continues to expand its audience rapidly. Despite its recent growth spurt, Facebook has run into trouble with some advertisers. Earlier this month the British government, Vodafone, the British automobile association, and Virgin Media all pulled their ads from the site after they appeared next to a group page for the racist British National Party. In response, Facebook said it would let advertisers in the U.K. limit which groups their Facebook ads appear alongside.

The Wall Street Journal has reported that Facebook is also planning a new ad network, which would allow advertisers to better target users. Facebook tends to have more personal and demographic data on its users than networks such as MySpace because it allows users the option of keeping their profiles private and in that scenario users tend to share more personal information. Such data is highly sought after by advertisers.

Mr. Weide said social networks would do well to encourage reluctant advertisers by considering additional tools such as peer review of content (via a flagging system) or software that would filter out offensive content, but warns that the social networks could go too far in limiting online speech.

"You can control what users upload, but you have to be careful," said Mr. Weide. He said if you crack down too hard, "Your service will become less attractive to users."