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The troubles popular social networks have experienced in monetizing their vast audiences are well-known.
But one of the ironies of troubled economic times - like we're facing now - is that the paper money so popular when times are good starts to play second fiddle to cold hard cash.
My post yesterday about YouTube's monetization problems highlight the fact that when all the hoopla dies down, executives start demanding "Show me the money!"
One need look no further than the social networking market to hear a lot of chants for "Show me the money!"
These troubles with social network monetization are periodically played up by the press and the New York Times decided to address the issue again as MySpace was getting set to roll out a redesign.
This redesign, launched last week, was in part inspired by the goal of making MySpace a better advertising platform.
According to Brian Stelter's article, "MySpace Might Have Friends, but It Wants Ad Money":
"In the fiscal year that ends in two weeks, the News Corporation unit that encompasses MySpace will miss its $1 billion revenue target."
Of course, it's worth noting that Rupert Murdoch purchased MySpace for $580m in 2005, so News Corp. has profited overall.
But clearly, MySpace is finding it difficult to monetize at the level expected and this is now starting to drag on News Corp., which saw several analysts downgrade its stock after the missed revenue target announcement.
MySpace, of course, is not the only social network finding it difficult to translate pageviews into profits. It is a victim of an industry-wide phenomenon that has companies invested in social networking scrambling to figure out how where the big money in social networking is.
Many seem to believe that improved targeting is the secret sauce that will rescue social networks from the advertising doldrums they're currently in.
MySpace has focused a considerable effort on targeting:
"The site is keen on hypertargeting, which places users in 'buckets,' based on their interests, and delivers ads accordingly. Nearly a third of the buys on MySpace are hypertargeted now, Mr. Berman said."
Stelter notes that this may not help:
"Yet there are concerns that social network users do not view ads, no matter how carefully the ads are placed. 'Users’ attentions are the most scarce element on most social networks,' Chamath Palihapitiya, the vice president for product marketing at Facebook, said. 'A successful ad product has to capture that scarce attention and engage it in a way that’s social and relevant.'"
Palihapitiya claims that:
"This is a journey that is going to unfold over the next five to 10 years. That’s when the winners will emerge."
Let's be honest - social networks like MySpace and Facebook don't have five to 10 years.
News Corp. shareholders aren't going to idly stand by if MySpace, once thought to be a potentially powerful driver of revenue growth, stagnates.
And if Facebook, with its $15bn valuation, can't deliver on the hype, it's going to find a lucrative exit harder to find, especially if it looks to the already IPO-resistent public markets for that exit.
The truth is that time is rarely the friend of businesses that have trouble making money and social networks have far less time to " figure it out " than many would like to believe.
Even technology industry veterans are starting to express the skepticism that one would more likely expect from someone from Madison Avenue.
Take Russ Fradin, for instance. Fradin held executive positions at Wine.com and comScore and is the co-founder and president of online ad network solutions provider Adify, which was acquired by Cox Enterprises for $300m in April). He recently stated, "I am highly, highly skeptical about (the value of) the data in social networks."
Radin went so far as to predict that the large amounts of "data" social networks have collected are not going to lead to an online advertising revolution:
"I don't fundamentally believe it's going to be such a secular shift because social networks have 'data.'"
So what are social networks to do if targeted advertising isn't the holy grail?
Sean Ryan, the CEO of Meez, has an idea - sell virtual goods that serve as status symbols.
Ryan argues that "a well-structured virtual item program should be able to generate, on average, $5-7 monthly from 5%+ of the monthly unique users."
As he would, of course, as an executive of a company that is in this market. One might expect me to agree with him given that I'm on the record as a believer in the virtual goods business model. But I don't.
When it comes to social networks like MySpace and Facebook, I doubt virtual goods are "the answer."
There are two primary reasons:
These social networks already allow users to "customize" their profiles quite significantly at no cost. MySpace, in particular, has few restrictions on how far users can go when it comes to "pimping out" their profile pages.
Thus, the value proposition for paid virtual goods seems weak and it's unlikely that MySpace would be able to successfully add restrictions that benefit a virtual goods business without alienating users.
- The virtual goods business model is best applied to online services that cater to specific demographics and that were ideal candidates for such a model to begin with. Executing it successfully as an afterthought on mass-market social networks is not ideal.
This is not to say that virtual goods couldn't work at all for social networks like MySpace and Facebook (which already does sell some), but I think it's time that executives at social networks start considering the possibility that they may have properties that are a bit less monetizable (and valuable) than they previously thought.
Despite the hype, there were never any guarantees that social networks would realize the potential that many saw in them and trying to fit the square peg that is advertising into the round hole that is social networking is going to be less a source of money and more a source of hernias.