Commentary

Make Social Networks Pay: Recast Ads

Social networks and search engines are now delivering the same level of online video referrals (according to Hitwise), but they remain worlds apart in their user monetization--the critical economic stumbling block for the bulging social food chain led by MySpace and Facebook.

The affinity bond among social network members that makes them a marketer's dream also makes them difficult to mine. Social network members don't mind volunteering their recommendations to each other, but they reject advances from uninvited advertisers and media companies eager to exploit their online preferences.

To make social networking pay, target advertising will need to be recast as a personal convenience. Users will be conditioned to compromise their online privacy for a steady stream of products, offers and services they would be most inclined to use. It could mean less search and more e-sales.

Advertisers also must convert to a system of creating and assigning personal CPM values to consumers who are "key influencers" (think Oprah's book recommendations) in a targeted social network group. Connecting with and mining users' "social capital"--rather than just demographics--requires a more open universal system, according to Forrester Research analyst Charlene Li. These social connections, which comprise about 16% of the world's online time, didn't even exist three years ago.

To price and leverage relevant word-of-mouth, social networks must become ubiquitous on all platforms, devices and applications. Universal servers (think cloud computing) will enable real-time social graphing and tracking, all of which will simplify social networking, Li explains. Consumers will maintain a single profile across all social sites (LinkedIn, MySpace), social services (Digg and Twitter), major aggregators, email platforms and e-commerce (AOL, Amazon, Google), and special-interest groups.

That means the ideal next generation of global mobile social assets will look something like YouTube + Facebook + Skype + PayPal, Morgan Stanley forecasts. Google will likely maintain its dominant share of the ad spoils.

Even in such a world, "social networks will have to compete on their ability to create an experience that can attract and retain the most valuable individual. Just like search, the competition will be just a click away. Yet, despite the similarities and constant innovation, people are amazingly loyal to specific search engines," Li said.

For now, the biggest online players are scrambling to leverage combined search engine and social-networking strengths. This is the driving force behind AOL's $850 million acquisition of Bebo, and News Corp's willingness to partner MySpace with a combined Microsoft-Yahoo. Even in a troubled economy, U.S. online social-network advertising will be $1.6 billion this year--on the way to topping $2.7 billion in revenues by 2011 spurred by the use of widgets, targeted ads in social e-mail and search, and the surge in online video, according to eMarketer.

Until peer recommendations--a social-networking staple--can be effectively monetized, social-network ad pricing and revenues will sorely lag that of search engines. The annualized global advertising revenue per user is a mere 72 cents for YouTube and $2.99 for MySpace, compared with $21.16 for Google and $8.85 for Yahoo, according to Morgan Stanley.

MySpace's new HyperTargeting platform--which allows marketers to target ads based on thousands of interests and hobbies described in member profiles--has yielded more than a 300% rise in click-through rates and have boosted the average CPM by about 50%. Still, Fox Interactive Group will miss its $1 billion revenue target for fiscal 2008.

MySpace is aggressively moving into digital music, customized news feeds, international and mobile content partnerships and third-party developer applications to hike revenues. Pali Research analyst Rich Greenfield estimates that MySpace revenues exceed $70 million (two-thirds from display and performance ads, and the remainder from Google search), and more than $15 million in monthly earnings.

Facebook is leaping ahead in global growth by fashioning less intrusive ads, rolling out teams of new third-party developer applications, and launching its own version of instant chat. Its hastily yanked Beacon service was the privacy wake-up call even its peers needed--revealing where social users draw the line. Nearly 60% of Web users surveyed by TNS said they are uncomfortable with advertisers using their browser history to design and place behavioral targeting ads.

Unless they can adequately monetize their delicate social user base, MySpace will never be worth an estimated $6 billion to $10 billion--or Facebook a lofty estimated $15 billion, based on the gaping discrepancies between CPM rates and revenues of social networks and search engines. An exception is LinkedIn, whose specialized business user base commands a $75 CPM.

The engagement treasure trove of online social networks may never be discovered by old-line media players such as News Corp. and Time Warner, who have a direct hand in guiding the fates of MySpace and Bebo. If they took the blinders off long enough to cater to the explosive potential of online social shopping recommendations by peers, they would have an immediate way of offsetting the revenue declines being forecast for traditional media outlets in 2009.

Deep breaths aside, some of this has to be mind-boggling, even to Rupert Murdoch and Jeff Bewkes. Perhaps the best evidence yet of the value of social influencers is Andrew Baron's eBay auctioning of his Twitter account, which includes some 1,400 subscribers to the unique online video series Rocketboom, which he co-founded and rode into a quick demise. But those 1,400 connections could be valuable to other entrepreneurs just blazing their cyber trails, not to mention some blue-chip advertisers.

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