Can social networking sites make money?

Remember Rocketboom on The Business of Social Networks in November last year?

It’s clear, social networking is the fastest growing activity on the web. We all know about MySpace and Facebook as the two giants in this field with 72 million and 34 million unique visitors a month (January 2008). But also the smaller players see a lot of people: Bebo (what’s small: 22 million unique visitors a month), Club Penguin (5 million), LinkedIn (nearly 5 million) and Ning (3 million). And all are growing.

When realizing that venture capitalists invest huge sums of money (remember Microsoft, who paid US$240 million for a 1.6% share in Facebook) you might think these sites generate a lot of income through advertising. Well, that’s not really the case: this year MySpace will earn US$100 million less than predicted and Facebook will even face a loss of US$150 million. The fact that many of the smaller players do not reveal any of their revenues doesn’t sound promising either. Is there another bubble-burst at hand?

Bryant Urstadt asked the same question and looked closer at this issue in his Technology Review article ‘The Business of Social Networks‘. He notices the low (and declining) CPM rates for ads on Social Networking sites (MySpace US$2, Facebook US$0.15) compared to for instance Mashable (varying between US$7-33) and TechnologyReview (US$70). But even these low rates do not persuade advertisers…

The problem with advertising in social networks is around three main issues: attention, privacy and content, according to Urstadt. Looking at the traditional advertising model, targeting is the key. And that reveals the difficulty; it is not so easy to target a specific group in a social network as it is for, lets say, Google. There people are specifically looking for clearly defined information, which makes targeting relatively easy. Not in social networks, where people are more busy with conversation with friends and can’t be bothered with commercial messages. Even stronger, many of them dislike it.

Getting in between users of social networks is very complicated and tricky, as you do not want to violate their privacy. Facebook tried with their Beacon program but failed (partially) and MySpace has developed its HyperTargeting system. Advertisers are moderately interested. Even stronger, looking at the US ad spending on social-networking sites relative to total US online ad spending, the odds are against social network-monetization.

Still, with all those millions of consumers at hand, their must be a way for advertisers to reach them (and to keep the social networks alive!). Although there is this fear of history repeating (Bubble 2.0), I do not really believe this, not more than a natural selection, a survival of the fittest (say Darwinism 2.0).

Two things to consider. One is that advertisers should reconsider their approach, their traditional targeting model. Maybe there is a more successful approach in cooperative marketing, co-creation and interactivity in relation to social networks. It’s the classical marketing paradigm: talk with them, not at them. Two, new technological solutions will be developed shortly that give way to another approach between consumers and advertisers. How that will look like, I have no idea (yet) but I agree with Bryant that the key is in the balance between openness and control. These new solutions prevent social networks to remain walled gardens, but where we can communicate across the borders of these communities, which opens a whole new ball game for both users and advertisers.

With that in mind, consider Google’s Open Social and the activities of Plaxo: take a look at the interview with Joseph Smarr, chief platform architect at Plaxo.

And then I haven’t mentioned the virtual worlds…but let’s talk about that another time

11 Responses to Can social networking sites make money?

  1. Pingback: Cubics serves tons of ads across social networks, no word on actual return

  2. Cheryl H says:

    The smaller custom social networking websites, those built for a smaller niche audience are relatively successful in generating revenues. By allowing business to use custom social networking software and web development, they are able to create not only an atmosphere filled with nothing but their target audience, but a great way to increase the “word-of-mouth” style advertising. So while the banner advertising on your social networking website giants may not be a huge income generator, the small custom social networks seem to be doing just fine.

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  4. Henry Brown says:

    Very informative and inspirational article.

  5. suchi bala says:

    i am doing research on this topic “how social networking sites earn money” plz giv me more info plz

  6. @suchi bala: What kind of information where you looking for?

  7. Terry Riggin says:

    It’s exhausting to search out knowledgeable individuals on this topic, but you sound like you know what you’re talking about! Thanks

  8. Warren says:

    Its interesting to note that even the small players have room to move in this market and it will be a trend at the end of the day to see who moves up or down..

  9. Warren says:

    By the way I loved your article it was very in-depth, you seem to have a good understanding of this market..

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