• by Diane Mermigas , February 12, 2008

It's not what you have, it's what you do with it.

That is the new golden rule in cyberspace, even as the biggest players jockey for position in an ad-powered online world. They're all scrambling for ways to integrate marketing and transactions into niche social networks. Finding ways to make it pay is a burning challenge for Google, Yahoo, AOL, Microsoft, Facebook, MySpace and their peers.

Controlling more of prime Internet real estate--as in the case of Microsoft's contentious bid for Yahoo--isn't enough to assure financial success. Many insist that Yahoo became vulnerable to takeover because it failed to better monetize its dominant user and advertiser connections. Even the entrepreneurial Facebook and MySpace, which put social networking on the map, are discovering that interactive marketing is more science than luck.

As those free-spirited sites increasingly work to mesh "money and cool," they need to remain true to their core, observed Noah Kerner, CEO of Noise Marketing, who recently discussed the challenges of monetizing social networking sites on a JP Morgan-sponsored client call. So far, Facebook, which barely generates $300 million in annual ad revenues, excels at creating social networking campaigns and tools. It shares the spoils in what is ultimately "a fusion of marketing and technology," Kerner said. A more engaged audience means more time spent online, which means $3 or $4 CPMs (like Yahoo) instead of 80 cent CPMs (like MySpace). That has an impact up and down the media food chain.

MySpace now generates more than $750 million in annual revenues--more than the $580 million News Corp. paid for it in 2005. About one-third is generated by its guaranteed revenue search deal with Google, and the remainder from display and performance advertising. But the fear is that MySpace users--falling to 69 million in December--are spending one-quarter less time on the social networking site (from a year ago) because of the ad infiltration.

Google founder Sergey Brin conceded on the company's recent earnings call that monetizing social-networking inventory for its revenue-guaranteed AdSense partners like MySpace has not gone as well as expected. "...I don't think we have the killer best way to advertise and monetize the social networks yet." Experiments so far have been "disappointing," he said. Where does that leave Microsoft, which has less than 5% stake in Facebook, if it succeeds with its unsolicited $45 billion takeover of Yahoo?

Recent Super Bowl advertising demonstrates that the necessary retooling has barely begun on Madison Avenue, where most marketers are incompetent or just plain reluctant about using social media for branding and driving traffic to company sites. Less than half of this year's Super Bowl advertisers had profiles on social networks, and only a handful had customized Super Bowl campaigns on Facebook, MySpace and YouTube. On the other hand, General Motors, Adidas, Dell and Starwood Hotels have joined media companies like Sony and Warner Bros., selling their goods and services in what could be the most advanced social network of all: the virtual world of Second Life.

Most of the 50% growth in domestic social-networking audiences in the next four years--to 105 million in 2011--will come from players like MySpace, YouTube and Facebook. Advertisers this year will spend at least $1.6 billion for time on social networks--up nearly 70% from 2007 and about half of what it will be in four years, according to eMarketer. Analysts say MySpace in particular has been taking all the right steps by building a support infrastructure, expanding its sales force and functionality and expanding to other global distribution platforms. Facebook now is headed down a similar path, but the learning curve between advertisers and social networks remains steep.

In a series of recent reports, Forrester Research addresses some of the issues of adapting to interactive marketing and becoming more customer-centric, which means tracking down consumers on their own digital turf. Companies under recessionary pressure will turn to established online communities and social networks with measurable metrics.

"Advertising campaigns often run into millions of dollars. But Facebook pages and blogs are two examples of social programs that you can start for next to nothing. Even more sophisticated programs like a full-blown customer community typically don't cost more than $50,000 to $300,000 to get going," said Forrester analyst Josh Bernoff. "If your message resonates with consumers, their word-of-mouth is a more effective medium than any of the traditional media."

The challenge is formidable for advertisers; most need to start from scratch in learning how to create and implement an online social strategy, or resort to completely reinventing their marketing organizations. The big companies controlling both sides of the social-networking ledger--as owners and as advertisers--find themselves in a double-sided quandary. More specifically, can a Microsoft buy Yahoo and its collection of online communities and surrender the draw of its online brand to monetize social networking? When it comes down to understanding and reaching consumers bound by their viral communities, can the corporate bulldogs take their egos out of the equation long enough to create interactive marketing magic?

The big question isn't whether Microsoft will get Yahoo. It's whether Microsoft knows what to do with it.