September 10, 2007

It has become very apparent today that social networking sites are increasingly being noticed and are now gaining a lot of traction as to their overall popularity. Internet surfers as well as the advertising industry as a whole are now taking notes, and many are expecting this could have some important changes in the way Internet advertising will onfold in the near term and what to expect next.

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This phenomenon has the potential to drastically change today's advertising on many Internet sites, as new marketing ideas are being created almost every day.

To many search marketers and industry analysts observing the future of Internet advertising, when Fox Interactive Media reported its first annual profit earlier in 2007, a very clear message was sent to skeptics everywhere.

This industry is changing rapidly and has the potential of causing significant changes in the way advertising on the Web is perceived by large publishers and Madison Street itself. To ignore these changes would be a great mistake.

Overall, the increasing growth in advertising and search revenue at sites such as MySpace is responsible for the unit's general profitability. Additionally, the numbers were far from many skeptics' concerns that advertising on social networking sites would never amount to anything significant. Now, all of this is changing very rapidly...

A few numbers in perpespective are needed

Social networking site (SNS) MySpace accounts today for about 80.8 percent of overall SNS traffic. According to eMarketer, in terms of advertising revenue, on any given day this accounts for approximately 57.9 percent of all SNS advertising revenues.

On MySpace, overall advertising spending in the United States has increased rapidly from $190 million in 2006 to approximately $525 million in 2007. If SNS site MySpace can make this work, it would seem more likely that competing sites would too.

Andrew Frank, research v.p. at Gartner said "overall monthly page views have reached about 39 to 44 billion at MySpace. Even if the average CPM (cost per thousand viewers) is only about a dollar, you're still talking about millions in ad revenue every month, and this is a very conservative estimate.

He added "a very small percentage of a very large number is still a big number, even by any standards used today."

Average assessments of today's market potential are increasingly optimistic to most observers.

Debra Williamson, an analyst with eMarketer says "if anything, we may be raising our estimates for SNS site ad spending, based on the increasingly growing results at Fox Interactive, and also the growing popularity of Facebook, which is clearly becoming one of most popular SNS sites on the Web today."

Williamson added "all those SNS users translate into additional page views, and advertisers are obviously very interested in that sort of thing."

On average, companies with a global market will spend about $1.2 billion in advertising on SNS sites in 2007. This estimate is a lot higher than the mere $445 million generated last year. In just less than four years from now, the numbers are expected to be about $3.6 billion, according to eMarketer.

In the U.S. alone, overall advertising spending on social networks as a proportion of total online ad spending is expected to increase from about 2.14 percent last year to 6.82 percent in 2011.

Greg Sterling, founder of Sterling Market Intelligence says "SNS Web sites like Facebook and MySpace that have large traffic volumes are definitely going to get some good revenue. With millions of users and an attractive demographic, large advertising agencies and search marketers definitely need to be on those SNS sites."

For its part, YouTube isn't even included as a SNS site in eMarketer's analysis simply because of the site's primary focus on online video, Williamson added.

However, the Google-owned SNS site does include a social networking component, but because of the much higher storage and bandwidth costs associated with video, it may not be quite as profitable as more traditional networking sites, Frank said.

He added "I think Google's strategy probably is a little more indirect than just having it be profitable on a stand-alone basis. I still think they see YouTube as a way to not only monetize traffic but also make it easier for some of their advertisers to get into the video ad space. It's hard to measure the profitability because that's an indirect contribution."

For 2007, MySpace and Facebook together account for about 72 percent of all online ad revenues in the in the U.S. and eMarketer estimates that they will continue to dominate at least through next year.

Compared with MySpace's predicted $525 million in online ad revenues for this year, Facebook will generate about $125 million, leaving about $180 million for other general social networking sites such as Bebo, Friendster and Piczo.

As a result of all of this, Internet advertisers are clearly ready to increase spending on SNS sites.

Whether that trend will continue will depend largely on whether those ads pay off for them, and that's still not entirely clear at this point.

As can be expected, there are still some skeptics that continue to say the whole thing is still too new in drawing any conclusions, and that more numbers need to come through and for a greater period of time in order to better understand the impact on advertising that social networking sites can have.

Part of the answer to that may depend on selecting the right form for the message, which can require some "tweaking" with the unique and often unfamiliar possibilities on social networking sites.

Sterling asked "is advertising on MySpace or FaceBook going to be more effective than one say on Yahoo? Clearly, if you're going for the 18-25 age demographic, it makes sense for you to pursue one of these SNS sites. Otherwise, there are still some very pointed questions about their overall effectiveness."

So how can companies capitalize on SNS?

Greg Sterling and many other industry observers note that there may even arise a new industry dedicated specifically to social media optimization that would be focused on helping Internet advertisers achieve a better overall ROI on social networking environments.

In deed, social networks may have to develop new revenue models to reflect such changes. When advertisers set up a presence for their brands on the networks or create viral marketing campaigns for example, "it isn't always clear how SNS sites can monetize that.

Frank said "I have difficulty in understanding exactly how advertisers are better off paying YouTube for banner ads versus creating their own viral videos, and then using the network to distribute them. This new industry is just starting to come to terms with some of these issues."

In the meantime, many say there's no doubt things will continue to change rapidly in this young Internet segment. Williamson said "in 2006, people thought social networking might be just a fad, but this hasn't happened yet, and instead, it seems to be sticking a lot more than most of the skeptics were saying back then."

Williamson concluded by saying "on average, many Internet marketers and search advertisers are now realizing that even if they weren't exactly certain they wanted to be on social networks before, now they just might take a good chance at it, and that today many are seriously considering investing a lot more into SNS ads than was initially believed."

She added "as a result, we will be following and analyzing this segment very closely."

Serge Thibodeau,
Professional SEO,
Rank for $ales.

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