It’s Even More Official: Social Networking is Hard to Monetize

Posted by: Spencer Ante on May 13, 2008

Looks like monetizing social networks is going to be harder than people thought, as we recently warned our readers.

Today, on May 13, research firm eMarketer lowered its forecast for advertising on U.S. social networking sites to $1.4 billion from $1.6 billion. That’s a 12.5% haircut—a significant reduction, especially since it’s coming from a research firm that has been pretty bullish on the prospects of running ads on social networking sites.

eMarketer senior analyst Debra Aho Williamson said the downturn in the economy was only partially responsible for the lower forecast. Just as important, marketers are cutting back on experimental advertising programs in favor of more known quantities. And Williamson says that social networks underestimated the difficulty of developing new advertising models and the time it would take to change the habits of marketers. “I think all of the challenges of reaching people in social environments are bigger than expected,” she said. “The growth is just slower than anyone expected.”

As part of its report, eMarketer also lowered forecasts for the two largest social networks, MySpace and Facebook. MySpace will generate $755 million in U.S. advertising revenues, down 11.2% from eMarketer’s previous forecast of $850 million. eMarketer now expects Facebook to produce $265 million in ad sales, down 12.9% from its previous forecast of $305 million.

The report corroborates the disappointing news that came out of News Corp’s earnings announcement on May 7. On the conference call following the announcement, News Corp Chief Operating Officer Peter Chernin said that the company’s Fox Interactive Media (FIM) division, which includes MySpace, would fall “roughly” 10% short of the $1 billion revenue target for fiscal year 2008 initially projected by chairman and CEO Rupert Murdoch.

The company also seemed to pull back from Murdoch’s previous promise of delivering 20% margins in its FIM division. When asked to specify what kind of operating margins FIM could deliver over the next few years, Chernin stressed that the company was now opting to choose investment over profit margin.

“I think we could have clearly escalated our margin this year,” said Chernin. “But we made a decision to continue to invest, and we believe that’s the right strategy. We’re seeing continued growth, and it’s too soon to start milking this thing for margin right now. I think it’s much more important that we keep focused on growth, both internationally and in terms of tools and applications for users here in the U.S.”

That’s all good and fine except for the fact that revenue growth is slowing. In the current quarter, FIM revenue was $210 million, down from $233 million the previous quarter. On a year-over-year basis, FIM revenue growth was 55% this quarter, down from 87% the previous quarter. Profits are declining as well. This quarter, FIM operating profit was $27 million, down from $47 million the previous quarter.

Moreover, the percent of revenue that MySpace is generating from its guaranteed advertising deal with Google is increasing (a concern we highlighted in a story last November)—the opposite of what you want to see in a growing company. In the most recent quarter, Google accounted for $66 million, or 31% of FIM’s $210 million in sales. That compares to $62 million, or 27%, of FIM’s $233 million in sales in the previous quarter.

All of this is not news per se. But it’s significant when companies and research firms fess up in public—even more so when execs provide an explanation for the shortfall.

During the News Corp. call, Chernin outlined many of the challenges facing social networks: Social media is still a young medium and does not have market acceptance yet; marketers are still struggling with how to measure success on the platform; and the sheer amount of ad inventory on social network pages has depressed prices.

Chernin outlined the solutions on the conference call as well: giving marketers better metrics and using increased targeting to boost advertising performance and price. MySpace already is working with brands to conduct studies showing the sales impact of ads and how they could help raise awareness of brands, says Jeff Berman, MySpace’s President of Sales and marketing.

The hope is that such studies will provide marketers with a more accurate, and favorable, view of their results on MySpace than the sheer number of clicks on ads seem to show. “We want to evaluate the brand lift here,” says Berman. - with Catherine Holahan

TrackBack URL for this entry: http://blogs.businessweek.com/mt/mt-tb.cgi/

Reader Comments

WilliamBanzai7

May 14, 2008 01:43 PM

There is a flaw in the monetisation tactics currently being applied in the social network space. Why should users cooperate if there is no quid pro quo running in their direction. If a user does not consent to the use of their profile and data for targeted or behavioral marketing, then the advertising content aimed at them will be plain old interruption marketing. The same nuisance as watching old media ads. If the user is offered a sufficient incentive to release their personal data (such as discounts or rewards for example), he or she may be more willing to put up with the nuisance. But the current model is: "We own your data and can do what we want to earn a gazillion dollars when we IPO or sell out to Microsoft." No wonder there is little brand loyalty in the social network space.

Michael Cain

May 14, 2008 04:26 PM

I'm inclined to agree. There is also, as stated in the article, little data on the lifecycle of social network advertising. Let us not forget that there is, by and large, a generational gap between the advertiser and the user. The fact that millions of people use the social networks does not mean that these same people are paying any sort of attention to these advertisements. The reality is, these platforms are primarily used for socializing, not shopping. I think the numbers show that advertisers are realizing this. As a user of both MySpace and Facebook, I have never, nor will I purchase or acknowledge any advertising of a product on either platform. I regard it as noise, like all of the ridiculous applications that are invented.

Kurt

May 14, 2008 06:19 PM

There is potential for advertising in social networks but it has to be highly targeted. In my marketing efforts I join and become active in networks related to my niche products. A quick search on http://findasocialnetwork.com yields many niche social networks that offer me the demographics that I'm looking for.

Dan Halliday

February 8, 2009 10:40 AM

Good example of niche social networks as the way to go on hip hop social network goldmic (http://goldmic.com)

Post a comment

 

About

BusinessWeek writers Peter Burrows, Cliff Edwards, Olga Kharif, Aaron Ricadela, Douglas MacMillan, and Spencer Ante dig behind the headlines to analyze what’s really happening throughout the world of technology. One of the first mainstream media tech blogs, Tech Beat covers everything from tech bellwethers like Apple, Google, and Intel and emerging new leaders such as Facebook to new technologies, trends, and controversies.

Categories

 

BW Mall - Sponsored Links

Buy a link now!