• by Diane Mermigas , March 23, 2009

The social-networking phenomenon is running rings around media and advertising companies scrambling to monetize consumers' obsessions. The chasm between where the media establishment is and needs to be comes from its inability to understand and mine evolving interactive social dynamics. Digital consumers are vibrantly making it up as they go; the media status quo is barely connected.

The powerful viral exchange of communications and content between family, friends and affinity group members is morphing so quickly that even the Internet's social leaders are straining to generate related dollars. Facebook's latest round of modifications makes it more Twitter-like, and MySpace's music exchange among friends has become an effective springboard for sales. Hulu.com, TV.com, MTV, AOL, and Disney are among the big guns that are feverishly integrating social-networking features. And that doesn't take into account the bloggers that are just a "noisy minority," says Parks Associates analyst Kirk Scherf.

Even as consumers continue to push their new interactive boundaries, legacy players are inhibited by their structural restrictions and general disorientation from doing more than incrementally chip away at social business models.

To be sure, social networking will be the backbone to monetizing digital media because it is consumer-centric and intrinsically ties to individual needs, desires and communities. Socialization is the biggest untapped opportunity of the digital age. It is driven by consumer relevance and measured by user engagement across all Internet-connected mobile, PC and TV devices. It's already an emerging force in video consumption and marketing.

Still, making social networking pay is a whole other thing. Its eventual monetization will have less to do with advertising as we know it and more with hyper-personal, hyper-local virtual location and affinity-based services and transactions. "The $64,000 question is whether companies will structure themselves to take advantage of those new economic opportunities," says Saul Berman, author of the latest IBM Global Business report "Beyond Advertising." Put another way, companies will not learn how to generate social-networking dollars until they stop straddling incompatible static and interactive worlds and shift their monetization strategies into digital high gear.

MySpace is leveraging its nearly 870 million unique users to generate an estimated $800 million in revenues, about one-third of which is generated by its waning Google search alliance. Google's YouTube has monetized its 1.2 billion unique visitors and only about 3% of its inventory to the tune of $200 million in annual revenues, Scherf says. The privately funded Facebook only generated about $300 million in revenues and huge losses in 2008. Twitter is experiencing explosive user growth and still threatening to report its first revenues.

The stakes are higher than ever.

Facebook is actually being credited with bolstering Google's market share gains and eventually could surpass the search giant in total unique users, according to an intriguing analysis by RBC Capital Markets analyst Ross Sandler. The inability to monetize unique visitors will cost News Corp.'s MySpace widespread layoffs or worse as its Google search pact expires in 2010, according to Pali Research analyst Richard Greenfield.

Social networking is a growing force--but no one knows how to make it work financially. A harsh indictment from Pew Internet's 2009 State of the News Media Study questions "whether the generation in charge has the vision and the boldness to reinvent the industry." More likely, as corporate legacy crumbles under the weight of its dysfunctional economics, newspapers, magazines, and even broadcast TV will turn to social monetization as a survival mandate.

For instance, now that the Seattle Post-Intelligencer is the largest newspaper available only online, it will be forced to monetize local and special-interest communities or lose that business to others racing to fill the void--from AOL and Yahoo to Inside.Out and Huffington Post. The same is true of other customized information so intricately linked to the social experience. Time Inc.'s new Lexus-sponsored Mine allows users to cherry-pick elements from its publishing brands to create a personalized magazine, but appears to lack any interactive social threads. Even visionary tech giant Cisco gets it--having just paid $590 million for Pure Digital Technologies and its popular Flip cameras so consumers can create and share video in their networked homes.

Frank Magid and Goldman Sachs Friday released new data suggesting that social networkig--and digital interactivity in general--will undermine all static media, including TV. About one-third of consumers using PCs for entertainment and about one-third of social networkers already watch less TV. Not surprisingly, Nielsen Media Research and Carat this week are due to release findings of a $3.5 million video consumer mapping study defending TV's unimpaired influence at the start of the advertising upfront season.

The truth is that television's survival lies in its ability to transform from passive to interactive and become what Razorfish calls a ubiquitous "social-viewing experience" that at least allows for sharing most watched lists, recommendations, multiplayer games and other related communication.

The fundamental point being missed is that the "connected class" eventually will pay for specific and relevant connections, services, marketing, content, recommendations, virtual goods, subscriptions and memberships. Collectively, such revenues that are a byproduct of social networking will dwarf advertising.

That said, the pervasive impact of social networking will far exceed conventional projections: 95 million U.S. social network users by 2013 (up from 76 million this year) and as much as $2.9 billion advertising revenues (up from about $700 million in 2009), according to Parks Associates. Those profiting from social networking today--from Craigslist and LinkedIn to Amazon and the first virtual president Barack Obama--already get how it works.

"Usage statistics and sales data don't completely capture the story that is unfolding," Razorfish reminds in its annual digital report. It comes down to one thing: your relevance and usefulness to the consumer.