• by Diane Mermigas , May 7, 2008

The race to monetize and leverage the power of social networks is turning into a stampede, as evidenced by Microsoft's recently renewed efforts to acquire Facebook in the wake of its failed bid for Yahoo.

Many of the biggest and most intriguing niche social networks are in play as a result of the Microsoft-Yahoo merger battle, which is fundamentally about potentially lucrative but unrealized advertising and e-commerce gains. Both companies have limited exposure to social networking--the most prominent being Microsoft's 1.6% stake in Facebook, for which it paid $240 million.

Not surprisingly, News Corp.'s MySpace and AOL's pending $850 million acquisition of Bebo have become part of the widening deal negotiations, even as social networks strain to push ad revenues to $2 billion this year. eMarketer estimates MySpace could generate $850 million in ad revenues, Facebook $305 million, niche social networks $150 million, and general social networks $255 million--or a fraction of the $26 billion-plus in this year's total Internet ad spend. Not even Google has aptly monetized MySpace under an ad revenue-sharing pact through 2010, for which it pays the social network nearly $1 billion in fees. Fox Interactive Media reportedly has queried Microsoft about assisting as a MySpace ad partner.

Still, the scramble for social networks is intensifying.

Allen & Co. is raising funds that would value LinkedIn at $1 billion after negotiations broke off with News Corp., which would have integrated the business social network with its newly acquired Dow Jones assets. Microsoft's investment in Facebook has given it a $15 billion valuation--providing MySpace with a $10 billion valuation, although neither has cracked the monetization code. A rush of new ad networks--such as Social Media, promising 3 billion ad impressions to more than 15 million unique monthly visitors--are bent on speeding up the process.

MySpace's way around the dual problem of possibly offending users and mis-pricing advertiser exposure has been to sell third-party developers one week of prominent placement on the site for as much as $100,000. Facebook and MySpace are inviting third-party developers to do some of the heavy lifting in devising new approaches to monetizing their sites, while providing do-it-yourself tools to advertisers to build and maintain their own brand platforms. Google's new OpenSocial is an ambitious developers' clearing house, while Facebook's solo efforts have attracted tepid, sometimes bruising responses to its more than 23,000 applications.

The Web's viral nature has yielded at least one irony: Companies such as the social recommendation service iLike rely on Facebook applications. Other newcomers--such as Watercooler, which relies on Facebook for most of its zealous sports and TV fan users--make money from an estimated $10.5 billion licensed merchandising market and an estimated $11.7 billion market in ticket sales, according to Venture Beat.

The mighty Google has brought a new sense of urgency to the social-network mining game by leveraging the iGoogle home page into a convenient aggregation of user-selected links to social sites and friends' personal pages. It is partly a play on the selective friend-tracking services provided by Facebook, Mugshot, Plaxo and FriendFeed. Aggregating, managing and monetizing users' personal connections and affinities is the digital world's biggest challenge.

Facebook stumbled on the challenge when its controversial Beacon program tried to peddle too much personal information. It drew the ire of Facebook users and at least one lawsuit, and made clear the notion that engaged consumers are the ultimate arbiters of how social networks evolve. Now the inevitable question facing social network owners and strategists is: Can the delicate framework of social-network communication and culture be preserved even as they are transformed for commercial endeavors? To succeed, they must capitalize on the convenience, relevance and personalization that matter most to consumers.

So what will break the log jam? When companies begin paying for the promise of social networks--whether it is Microsoft buying more of Facebook, or Yahoo buying into AOL or MySpace partnering with someone--they must see a return on investment. That pressure already hounds News Corp., which paid only $580 million for MySpace and is still fumbling to develop an ad component. Although it claims a whopping 74% of all U.S. social network visits, MySpace CPMs can be as low as 10 cents, compared with around $75 for LinkedIn's affluent, older professional user. In the social-networking world, users' individual nuances are far more valuable than their sheer numbers.

The lessons learned about how to make online social networks more constructive and profitable will have far-reaching ramifications for all digital media's community-driven business--from the players of "Grand Auto Theft IV" to the kids and families of Walt Disney to the Dow Jones business constituency. Eventually, the economics of most Web sites will be secured by social networking and community elements. If the business minds don't crack the monetization codes, chances are that tech-empowered consumers will.

Ning, a do-it-yourself social network company already valued at $500 million, has aided the development of more than 100,000 social network sites. That's the beauty of the digital interactive age: The answers lie within.