The Social Web: Are Sites Cashing In on Advertising?

When News Corp.’s Fox Interactive Media unit reported its first annual profit earlier this year, a message was sent to naysayers everywhere about the future of online advertising.

Growth in advertising and search revenue at MySpace was largely responsible for the unit’s profitability, and the result was a figurative sweeping away of many skeptics’ concerns that advertising on social networking sites would never amount to much.

MySpace currently accounts for about 81 percent of social networking traffic and about 58 percent of advertising revenues on such sites, according to eMarketer. U.S. advertising spending on the site has increased from US$190 million last year to about $525 million this year, the firm says.

If MySpace can make it work, suddenly it looks a lot more likely that others will too.

Increasing Estimates

“Sites like MySpace and Facebook that have enormous traffic volumes are definitely going to make money,” Greg Sterling, founder of Sterling Market Intelligence, told the E-Commerce Times. “With millions of users and an attractive demographic, advertisers want to be on those sites.”

Monthly page views have reached 40 to 45 billion at MySpace, noted Andrew Frank, research vice president with Gartner, so even if they average CPMs (cost per mille, or cost per thousand viewers) of just $1, “you’re still talking about millions of dollars a month in ad revenue at the low end,” he told the E-Commerce Times. “A very small percentage of a very big number is still a big number.”

Indeed, assessments of the market’s potential are increasingly optimistic.

“If anything, we may be raising our estimates for social network ad spending based on the good results at Fox Interactive and also the increasing popularity of Facebook, which is becoming one of most popular sites on the Internet,” Debra Aho Williamson, a senior analyst with eMarketer, told the E-Commerce Times. “All those additional users translate into additional page views, and advertisers are very interested in that.”

A Growing Proportion

Companies worldwide will spend $1.2 billion advertising on social networks this year, up from just $445 million in 2006, eMarketer says in a May report. By 2011, the figure will be $3.6 billion, the firm estimates. In the United States, advertising on social networks as a proportion of total online ad spending will increase from 2.1 percent in 2006 to 6.9 percent in 2011, eMarketer says.

MySpace and Facebook together account for about 72 percent of all U.S. online ad revenues in the category this year, and eMarketer estimates that they will continue to dominate at least through 2008.

Compared with MySpace’s predicted $525 million in U.S. online ad revenues for 2007, Facebook will generate about $125 million, leaving about $180 million for other general social networking sites such as Bebo, Friendster and Piczo and about $70 million for niche and marketer-sponsored sites, eMarketer says.

What About YouTube?

YouTube is not included as a social networking site in eMarketer’s analysis because of the site’s primary focus on online video, Williamson said.

The Google-owned site does include a social networking component, but because of the higher storage and bandwidth costs associated with video, it may not be quite as profitable as more traditional networking sites, Frank said.

“I think Google’s strategy probably is a little more indirect than just having it be profitable on a stand-alone basis,” Frank explained. “I think they see YouTube as way to not only monetize traffic but also make it easier for some of their advertisers to get into the video ad space. It’s hard to measure the profitability because that’s an indirect contribution.”

ROI for Advertisers

Clearly, advertisers are increasingly ready to spend on social networking sites. Whether that trend continues depends on whether those ads pay off for them, and that’s still not entirely clear.

“Is an ad on Facebook or MySpace going to be more effective than one on Yahoo?” Sterling asked. “Certainly if you’re going right for the 18-25 demographic, it makes sense for you to pursue one of these sites. But otherwise, there are still some questions about their effectiveness.”

Part of that may depend on choosing the right form for the message, which can require some experimentation with the unique — and often unfamiliar — possibilities on social networking sites.

“It’s easy to buy a banner ad — that’s something marketers are familiar with,” Williamson explained. Developing sponsored groups and profile pages, on the other hand, involves taking some risks.

Need for Experimentation

“It’s been more of a challenge for the social networks to get advertisers to sign up for that type of advertising,” Williamson said. “It takes a lot of thinking and effort to develop something like that, and everything that’s a big project is a big sell. It is happening, but much of it is still experimental.”

Yet much of the promise of social networks for advertisers lies in their ready connections among similar groups of users, offering marketers the ability to take advantage of word of mouth and enable the rapid spread of viral campaigns.

“Going forward, I think marketers and social networks will need to focus more on techniques like creating groups and profiles in order to continue their success in this area,” Williamson said.

Fear, Uncertainty, Doubt

That, in turn, will require not just a willingness to experiment, but also that marketers start to overcome their “historical unease about being side-by-side with user-generated content and worries about the effects on their brands,” Sterling said.

“I think those fears will be overcome with time, especially as more sites add community and user-generated content to their features,” he added.

Privacy issues have also put some “dark clouds over this space,” but a growing trend toward user control over profile visibility should take care of much of that, Frank noted.

Social Media Optimization

There may even arise a new industry dedicated to social media optimization, Frank predicted, focused on helping advertisers approach social networking environments.

Then, in turn, the social networks may have to develop new revenue models to reflect the changes.

When advertisers set up a presence for their brands on the networks or create viral widgets, for example, “it’s not always clear how the social network can monetize that,” Frank noted.

Even on YouTube, “I have a persistent difficulty understanding how advertisers are better off paying YouTube for banner spots versus creating their own viral videos and using the network to distribute them,” he added. “The industry is just starting to grapple with some of these issues,” Frank said.

A Moving Target

In the meantime, there’s no doubt things will continue to evolve.

“It’s a moving target,” Williamson said. “A year ago people thought social networking might be just a fad, but it has staying power.”

However the details and the revenue models evolve, she concluded, “Marketers are now realizing that even if they weren’t sure they wanted to be on the social networks before, now they just might.”