Social Web sites struggle to find the path to profit

Hmm, interesting..
Tuesday, March 25, 2008

SAN FRANCISCO: Virtual beer and vampires may no longer be enough to keep members of social networks like Facebook and News Corp.’s MySpace riveted to their computers.

Instead, the key to the future of these Web sites may lie in more practical functions, like making plans, booking tickets or checking stock quotes.

“Right now, the big challenge for social networking services is finding a way to simultaneously encourage user loyalty and revenue growth,” said Ri Pierce-Grove, an analyst with Datamonitor, a research firm.

Simply put, if people do more things on social networks, they stay online longer, share with friends and reveal more about their tastes and habits, allowing advertisers to focus their messages better. Advertisers usually pay sites based on the number of times an ad is clicked, and people are more likely to do that if the ad is specifically aimed at them.

EMarketer, a research firm, predicts that U.S. advertising spending on social networks will exceed $1.6 billion this year as the sites and companies that make applications for them push to harvest more personal information posted online, then sell it to advertisers.

But the search for the best way to do so is still on.

Advertising on Google’s social networks, including a partnership with MySpace, brought lower-than-expected revenue in the fourth quarter, Sergey Brin, a co-founder of Google, said in January.

“I don’t think we have the killer best way to advertise and monetize social networks yet,” he added.

Meanwhile, people may be tiring of the activities that social networks do offer.

Although these sites have added thousands of members in the past year, comScore data show that fewer people are signing on, and members are visiting their profiles less.

For instance, the number of U.S. visitors on MySpace fell to 68 million in February from about 72 million in October, while the average time people spent on their Facebook profiles dropped to 161.3 minutes from 195.6 minutes.

This indicates U.S. social networking is at the “mature stage of the growth curve,” said a comScore spokesman, Andrew Lipsman.

Part of what made social networks popular are widgets. One of these small programs, “Vampires,” lets members virtually “bite” friends. Another application allows people to prod their friends virtually by sending messages that they have been “poked.”

Millions of people got hooked on these widgets, creating a new audience – and potentially a new market – for advertisers hoping to tag their messages to these applications.

The excitement around widgets touched a high point in January when Slide, which makes a tool that lets people create slide shows and put them up on any social network, secured $50 million from large institutional investors.

But some wonder whether squeezing sustainable cash from this audience will require more than fun and games.

Investors “are going to lose of lot of money,” said Charles Moldow, general partner of the venture capital firm Foundation Capital. The widgets currently in fashion are very “lightweight” and do not command the loyalty of their audiences, he said.

Social networks benefit from engaged users who share their likes and dislikes with friends, helping advertisers through word-of-mouth, or “viral marketing.”

“If you can tap into that and then there’s sharing, if you have a big audience that’s engaged with you, you will be able to make money off it,” said David Card, an analyst with Jupiter Research.

Although many fun-and-games widgets do have this viral power, analysts believe there is more money to be made by making these applications richer.

Useful widgets that let people share experiences aid viral marketing and increase the efficacy of targeted advertisements, while keeping people online longer.

“Widgets that keep you updated on concert tour dates for your favorite bands, weather widgets – there’s a lot of promise in that kind of campaign,” Card said.

A conviction that this is the road to success for social networking has led many investors to fund useful widgets.

Silicon Valley venture firm Khosla Ventures and IAC/InterActiveCorp’s Ticketmaster have invested in iLike, a program that lets people post songs on profiles and has a link to Apple’s iTunes store so friends can sample and buy the music.

But many analysts cautioned that marketing tailored to people’s online behavior – while an exciting opportunity for companies – might not succeed if people feel their privacy is intruded upon.

Sites are also grappling with the challenge of serving up unobtrusive ads that will entice users to click and share with friends.