but was disappointed in their cover story in the current edition, where
Bryant Urstadt looks at the current state of the social network sector
and concludes that social networking is not a business
(free registration required). The article essentially looks at CPMs in
the current business (which are low), concludes that revenues are low
relative to traffic, and it might all just be a fad.
I have to admit to being biased about social media, but I think that
the author’s lack of knowledge in this area (he typically writes for
Rolling Stone and Harper’s) really shows. As examples of how poorly
social networking sites are doing he proffers four pieces of evidence:
1. MySpace will fall $100m short of its revenue predictions this year. This means that it will only do $650m in revenue and only grow revenue by 100% according to Goldman Sachs.
2. Facebook will only do $50m in EBITDA this year.
3. Ning won’t tell him their revenue
4. CPMs for social media sites are lower than that of Technology Review
Maybe I’m a glass half full kind of guy, but I’d call the first two
pieces of evidence pretty promising! The third is hardly surprising as
very few private companies want their revenues to be publicly
disclosed. And the fourth is a completely specious argument; I’m sure
that the Technology Review’s website’s traffic is tiny and that its ads
are bundled with that of the print publication, so any sort of
comparison is meaningless.
That being said, MySpace and Facebook are far and away the two most
successful social media sites at monetizing so far. It is fair to say
that click through rates and CPMs are low relative to other forms of
online media. The author thinks that targeting is the answer to raise
CPMs. I think that is part of the answer, but I don’t think it is the
whole answer. It is certainly the answer for social media apps like Flixster (a Lightspeed portfolio company) and Dogster,
both of which offer a very targeted audience to endemic advertisers. In
these cases, CPMs are not in the sub $1 range, but are comparable to
other internet media sites with similarly targeted traffic, often in
the single digit or low double digit range.
For the social games category of apps, likely the answer is free to play games with virtual goods models.
This is the direction that the rest of the gaming industry appears to
be moving towards, and social games are a subset of that trend.
For the vast majority of broad reach social media sites though, I
think that the answer lies in a new ad standard for social media. The
thing that differentiates social media sites from other forms of online
media is not just user generated content, it is also that users are
willing to affiliate themselves with brands. This takes many forms,
from friending Scion on Myspace to putting a Natasha Bedingfield style on your Rockyou photo slideshow, to buying one of your Top Friends a Vitamin Water.
These willing user affiliations/endorsements of brands are clearly
valuable to marketers of those brands. Right now though, these deals
are being negotiated on a one off basis; they look more like business
development deals than selling ads off of a rate card. It will take a
while for the social media industry to establish standards for selling
this incredibly valuable inventory to brands, but I suspect that this
will happen over the next 12-36 months.
There is an interesting parallel to search advertising here. In
2000, search inventory was monetized like every other form of online
inventory, through banner ads. It wasn’t until Overture, and later
Google, adopted the text ad-CPC standard that the distinctive thing
about search inventory, user intent, was appropriately monetized. This
created a new category of advertising that is now larger than banner
advertising. Although some might disagree, I believe that a similar
opportunity will eventually be unlocked by social media once the right
ad unit standards emerge
In the interim though, targeting and scale go a long way. As Myspace
has shown, $650m here, $650m there, and pretty soon, you’re talking
about real money!