Is social media a business?

I am a fan and subscriber to the paper version of Technology Review, 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!