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Social Networking Is Not A Business — But It Might Be Soon

Excellent article in this month’s Tech Review by Bryant Urstadt on the business side of social networks. Highly recommended. TR site registration required, but free.

A few tidbits catching my attention:

  • Facebook impressions run 13 to 16 cents CPM. For comparison, our clients in aggregate pay $10 eCPM on Google, and $6 eCPM on Yahoo. The fact FB can’t command higher CPMs speaks volumes to how advertisers value those impressions.
  • Regarding the “content adjacency” problem, where ads on the social nets might run alongside content objectionable to advertisers, Chamath Palihapitiya Facebook’s VP states that the FB community self-moderates by flagging inappropriate material. Urstadt comments:

    Palihapitiya deliberately or otherwise, may be missing the point: advertisers dislike rude content not merely because it might reflect badly on their brands, but because the people reading such stuff are probably not thinking about buying many things that advertisers are selling.

  • MySpace generated $800mil in annual ad revenue (2007 stat?) Surprising to me, I would have guessed less.
  • Urstadt again, emphasis mine:

    Advertising on Google works because visitors come to Google looking for specific information. If a user who types in “scooter” in the site’s search field is hoping to buy a scooter, the keyword results that appear at the right of the search results can be more useful than the results themselves. In social networks, on the other hand, users show up to find friends; ads are, at best, irrelevant to that goal. The click-through rates on social networking sites bear this out. While around 2 percent of Google users actually click on a given ad (and the number is much higher when users are conducting searches for purchasing reasons), fewer than 0.04% of Facebook users do, according to a media buyer’s report obtained last year by the Silicon Valley blog Valleywag.

Worth checking out.

The article: Social Networking Is Not A Business — But It Might Be Soon, Bryant Urdstat, July/August 2008 TR Review

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  • Alan Rimm-Kaufman
    Alan Rimm-Kaufman founded the Rimm-Kaufman Group...
  • Comments
    7 Responses to “Social Networking Is Not A Business — But It Might Be Soon”
    1. Jeff Cornejo says:

      Maybe the business is not in the social network, but in the services that spring up around the social network…which get acquired.

      http://daringfireball.net/linked/2008/07/15/twitter-summize

    2. Excellent article and definitely worth the time to read. A few other tidbits caught my eye:

      * There are 150 people working on MySpace’s HyperTargeting system? Doing what, exactly? From my experience, the best models are built by tight teams of 3 or 4 people. I’ll give them an order of magnitude to be generous, but wow. I’ll bet they generate PowerPoint decks at a 5x – 10x rate of their model improvements. I hope the “150″ is an editing mistake.

      * 6 percent of advertising dollars are spent online, buy 20 percent of media consumption is happening online. That’s an apples/oranges comparison to the offline (mostly TV) world, where consumption is very passive. Online, it tends to be interactive, with the user actively switching among options (look at your own YouTube viewing habits, for example). Compare the 6% against the *passive* online media habits and I wouldn’t be surprised if the online spend is actually OVERweighted against online passive consumption.

      At the end of the day, I’m convinced there will be a number of business models for social media, and at least a few of the investors will have their investments pay off. It’s just not there yet.

      My analogy to the Web2.0 social networking business as it exists today: How about a business model where you bring in a water cooler and soft drink machine into offices. You charge the office nothing (and even pay for the power) and, to entice people to congregate around the machine, you provide the water and soft drinks to the staff for free. In exchange, you simply ask for video screens to be allowed to run over the cooler and to place advertisements on the sof t drink machine and on the water cups. You, the entrepreneur, will make money through the high CPM you can charge for the valuable placement and high frequency of messaging.

      Anybody want to invest in THAT business? Didn’t think so.

    3. Honestly we never thought that social networking ads really worked – that is until we saw recent data. We are surprised but hey, I guess it’s another great medium for advertisers now!

    4. Thanks for the thoughtful comment, Mark. Do feel free to drop off some of those free video soda machines at our offices any time next week. :)

      Hi PPC Journal — can you share more about the conversion rates you’re getting, and what click volume you’re buying?

      Without disclosing anything you’re uncomfortable disclosing, what type and pricepoint of product are you selling through the social network advertising?

      Jeff — yeah, “get big and get bought” may very well be the profit/exit strategy for many of these folks. That is, Google is the ultimate customer, not the network participants.

    5. The Valleywag media buyer stuff is outdated, afaik. That was pre-Nov 6 and the new system. I did a presentation on the new system at FacebookCamp Montreal back in November, and I had a slide titled “From $300,000 to… Free” regarding that media buyer and some of what FB was selling them vs what happened now.

      Also, you can get higher ctrs than .04% … I’ve seen as high as .16 personally, and know others who’ve done better.

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