Honeymoon Is Over For Social Networks

by Gavin O'Malley, Apr 20, 2007, 6:00 AM

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The honeymoon is over for social networks. They need to start generating revenue now or bow out of the race, according to a new report from In-Stat.

"In order for a social networking site to be successful, it must attain a critical mass, and competition is fierce to attract new members," said In-Stat analyst Jill Meyers.

Demonstrating the importance of continuous innovation, MySpace on Thursday began testing a service that scours the Web for news stories for its community to rate and comment on.

The service, MySpace News, combines some of the more successful characteristics of Yahoo News and Digg.com, which display stories according to their popularity ranking with readers.

One rather controversial possibility for networks trying to generate revenue is the selling of user data, according to In-Stat.

"Each social networking site collects a plethora of personal and demographic data on each member," said Meyers, "and while selling these data to target marketing groups may be unappealing to site members, it may be the best route to profitability for site operators."

Despite an increasingly older MySpace community, Baby Boomers are frequently overlooked when it comes to social networks, added Meyers. "So far, sites have focused their attention on a younger demographic, which is finite, fickle and limited in expendable income."

If one thing is certain, it is that the mere existence of a social network is no guarantee of success. Visitor growth rates vary widely from 1177% for a site by the name of Sconex.com to a 40% decline for LiveJournal.com, according to comScore Media Metrix.

Ad spending on social networks this year is expected to total $865 million, according to eMarketer. MySpace is promised the bulk of that spend to the tune of $525, while its myriad rivals -- Facebook, Bebo, Friendster -- are being left fighting over about $200 million.

An additional $95 million in ad dollars is expected to go to social networking offerings from the portals like MSN Spaces and Yahoo 360, while eMarketer predicts about $45 million will be set aside for vertical social networks and marketer-sponsored networks.

Marketers have for several years now cited the value filling social networks with branded profile pages. Microsoft's Digital Advertising Solutions Group, for instance, commissioned a Metrix Lab study, which found that creating brand profiles that can be forwarded to friends is effective, with a quarter of social networkers posting views on specific ads and a third forwarding spaces, ads or links.

But, while the trend is likely to persist, the days of every brand maintaining its own MySpace profile page are over, according to eMarketer senior analyst Debra Aho Williamson.

"The notion of creating a MySpace ad profile page and collecting friends was popular in 2006 but will likely give way this year, as users tire of collecting 'friends,'" said Williamson.

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