Many new ‘friends’ to be made online, but what about dollars?

Social network websites are booming. If only they could turn a profit.

By , Staff Writer for The Christian Science Monitor

They like to meet, chat, make friends and business connections. They post photos and videos. They share their passion for a celebrity, hobby, or cause. But what they usually don’t want to do is shop.

Visitors to social network sites represent a lucrative market. The largest, MySpace, can claim 73 million users in the United States alone. And No. 2 Facebook has 37 million, according to ComScore, which measures online activity. Fast-growing Facebook alone recently was valued at $15 billion.

But so far those impressive visitor numbers have yet to translate into a financial bonanza for the sites. While observers agree the potential is there, they also say that the very nature of advertising and marketing may have to evolve if it is going to capture the attention of people who are looking not for goods and services but for each other.

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Last spring, eMarketer, which studies advertising on the Web, downgraded its ad sales projections for both MySpace and Facebook by more than 10 percent for the fiscal year that ended June 30.

Even Google has failed to extend its golden touch to social-networking sites. In 2006 Google paid MySpace $900 million to place ads on its pages. The search giant also operates its own social network, Orkut, which has been growing, especially outside the US.

But in a February call with financial analysts, Google cofounder Sergey Brin conceded that the investments “didn’t pan out as well as we had hoped.... I don’t think we have the killer best way to advertise and monetize the social networks yet.”

Neither has anyone else, apparently, even though millions of people worldwide are spending more and more time on these sites.

“It’s been a huge disconnect between traffic to social network sites and revenue,” says Debra Aho Williamson, a senior analyst for eMarketer.

The challenge is almost hard-wired into the business plan, says Gary Stein, director of strategy at Ammo Marketing in an e-mail. “Although you’ve provided the infrastructure, the network and all the interactions belong to the members,” he says. “That is, they feel like the space and the networks are theirs, and are very uncomfortable with you, as a company, taking too much advantage of it.”

Conventional “click on me” ads haven’t been seeing the same success they often do on search engines such as Google.

Mark Brooks has placed ads on MySpace and has been “amazed” at the low response rate, even on large, well-placed ads. The veteran marketing consultant says the puny results were almost “unbelievable.”

“People clearly, especially on the social networks, [are] not particularly interested in clicking on the ads,” says Mr. Brooks, who as editor of socialnetworkingwatch.com has followed the online industry for a decade. “Advertising needs to evolve, and social networks are forcing this change. People are really tired of being assaulted [by ads], but they still love to buy.”

Networks are scrambling to find a winning formula. Both MySpace, owned by News Corp.’s Fox Interactive Media, and Facebook, founded by Harvard University student Mark Zuckerberg in 2004, are in the midst of redesigning their sites. MySpace is trying to sell items like cellphone ringtones and concert tickets to its young demographic. MySpace Music aims to compete with Apple’s iTunes, and the network will allow members to sell items, eBay style, says Ms. Williamson from eMarketer. Facebook reportedly will begin allowing credit-card purchases.

Others observers have suggested that “virtual gifting” might make money. Two social network sites in Asia – qq.com, with 300 million users in China, and cyworld.com, in South Korea – promote the buying and sending of on-screen items that can decorate a user’s own home page or be sent as a gift to a friend. “It seems to be a distinctly Asian concept,” Brooks says, noting that the idea “bombed” when tried as an experiment in the US.

Other ideas include selling online games or charging for different levels of access to a site.
Advertisers are also trying to reposition themselves from hard-sell marketers to a softer approach as helper and “friend.” That sometimes subtle shift hasn’t been easy to pull off.

Social networks, along with the rest of the Web, are expected to expand onto phones in the coming years, giving users even more opportunities to spend time with them. The sites also offer a tempting platform for targeted ads aimed at people who have particular interests.

As users share personal information within their networks, companies have an opportunity to capture and employ this data for targeted marketing. Social networks are building huge databases about where users go and the people they connect with, says Fred Stutzman, a doctoral candidate at the University of North Carolina who studies social networks.

Most users don’t think much about the personal information they’re sharing, Mr. Stutzman says. “We’re not thinking about behind the scenes.” Facebook already sells targeted advertising based on this demographic information, he says. With so many tools available, the long-term possibilities for marketing these sites remain wide open.

“They’re going to be a place that can be monetized,” Stutzman says.

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