Where Portals and Social Networks Collide

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Perhaps they'll end up sharing revenue or ad space, a business model that's being employed with certain partners by Flock, whose new Web browser aggregates content from Facebook, Twitter, and other social sites. For example, Flock shares some of its ad revenue with Photobucket, which promotes the new browser on its site, says Flock CEO Shawn Hardin. But sharing arrangements like these are complex. "There's a lot [such as business, privacy, and security issues] that needs to be sorted out," says Ken Cassar, a vice-president at market researcher Nielsen//NetRatings. "There's going to be a need for cooperation between companies that are competing with one another."

The Openness Gamble

There's little doubt Yahoo and Google would like to yank the social network advertising blanket closer. Take Google's new Friend Connect, which acts as an intermediary between social networks like its own Orkut service and sites like Michaelson's. Whenever users sign into IngridMichaelson.com with Friend Connect, Google tracks the time, how they interact with the site's gadgets, which friends they invite to join, and any new friends they make there. Such information could allow Google to better tailor the ads it displays to users on those sites, which might make advertisers willing to pay more.

Then there's Yahoo, which wants consumers to spend more time on its properties—and less on dedicated social networks. A new version of the Yahoo Messenger chat application will link users to content that friends on their buddy lists post on other Yahoo properties, such as the photo-sharing site Flickr. And yet, though Yahoo declined to confirm this, a MySpace executive says the new Yahoo Messenger may have an "import MySpace contacts" button. Then, "when I touch your name in Yahoo Messenger, I see titles of your blogs, your photos, pulled dynamically from MySpace. It makes Messenger more useful," suggests Steve Pearman, senior vice-president for product strategy at MySpace. "It's a good nod toward a reality that users are not going to spend their waking hours on one site."

For MySpace and Facebook, "all of this openness is a big gamble," says Debbie Williamson, an industry analyst at eMarketer. "It's a big gamble on who is going to control this [user] info" and the bulk of the ad revenues. Yet it's a wager both companies appear willing to make with their impressive revenue growth beginning to slow. On May 13, eMarketer reduced its 2008 projections for ad spending on U.S. social networks from $1.6 billion to $1.4 billion. That would still represent a 55% gain from last year, but pale in comparison with the 163% jump seen in 2007. Likewise, the News Corp. subsidiary that includes MySpace recently slashed its 2008 revenue forecast, blaming the weak economy, though it's still expected to grow in the high double-digits.

Making Data Portable to Boost Traffic

More worrisome, traffic to social networking sites fell 16% in April compared with a year earlier, according to consulting firm Hitwise, which tracks 57 social networks. "Last year, people were curious, were testing social networks, and then they left," says Heather Dougherty, Hitwise's director of research. One reason: The sites don't offer enough features to keep users interested, a problem that could be rectified if they could take their friends elsewhere.

In that sense, data portability offers fad insurance for social sites. If a site ceases to be a popular destination for users, it can still maintain a hold on them by bringing their valuable contact information and personal preferences to other sites—in the social network's branded package. "It gives staying power to the social [connections] and the social network," says Hadi Partovi, president of iLike, a popular music service on major social networks that is working with Google's Friend Connect to further expand its service.

Beyond merely keeping users, social sites hope they may even see a traffic boost by making their information portable. "It exposes more people to our application. …Our growth increases, not decreases," says Digg CEO Jay Adelson, whose news-sharing site exports some of its features to Facebook and other social networks. "It doesn't mean that destinations go away," he says.

In fact, Adelson and his counterparts at major social sites are watching carefully to ensure that making key aspects of their user data portable doesn't harm traffic to their own destinations. After all, it's the ads served on their own hubs that still generate the majority of revenues. Any ads their users view on other sites can provide additional revenue so long as they don't keep people from seeing the ads on the main site. "They don't want to leak users," says Ray Valdes, Gartner's (IT) research director for Web services. And until they work out how to make money from them, keeping users happy may be the best social networks can hope for in the short term.

Kharif is a senior writer for BusinessWeek.com in Portland, Ore. Holahan is a writer for BusinessWeek.com in New York.