Advertising on Social Networks – Does it Pay?

An eMarketer report predicts increasing advertising revenue from social networking websites such as MySpace and Facebook. MySpace recorded an annual profit of $440 million for the year ending on June 30th 2007. Factors that will contribute to the continual increase in online advertising revenue for MySpace include advances in advertising capabilities, partnerships with major search engines (eg MySpace and Google, Facebook and Microsoft) and growing use of social networking sites globally.

One example of the partnership trend is that of Microsoft and Facebook. Microsoft has agreed to pay US$240m for an equity stake in Facebook. The agreement gives Microsoft exclusive third party advertising rights for the social networking site and advertising will extend internationally.

There are two trends at play here. Firstly, advertisers are looking for alternatives to the growing cost of advertising on major search engines. There is only so much real estate on search engines to accommodate rising demand and advertisers are bidding higher to maintain positions. The second is the loyalty of social networking users and the rich sources of information available to advertising agencies. At the intersection of these trends are new billboards for advertisers to reach their target markets.

Another interesting trend is the growing number of social networking sites. How many social networks will an individual belong to? At some point the administrative cost of maintaining content on a website will preclude joining another. I for one, belong to 3 social networking sites for different purposes and am unlikely to join another – unless there is a compelling reason to do so. However, if new social networks can attract members then they will become more attractive to advertisers and, as you can see from the figures above, this can be quite lucrative.

Some of the newer social networking sites are taking a different approach to the majors. For example, one of the newer search engines in Australia, called LinkAU, has developed community based portals. So rather than belonging to a global network, members can choose to join a local portal and connect with other people in their local areas.

This is an interesting idea from an advertising perspective as it opens the door for local advertisers to reach their local markets at a lower advertising cost (or at least that would appear to be the intention). Although major search engines are offering better capabilities for geographical targeting, local advertisers still compete with large companies with big advertising budgets for prime positions. This just might prove attractive to smaller businesses looking to attract business from their local areas.

There is much debate about whether advertising on social networking web sites is worthwhile for advertisers. Given the level of investment we are seeing from search engines and others in social network s, they must see opportunities to generate revenues. To achieve this though, they must be able to help advertisers assess the return on their advertising spend, just as the major search engines have done and then they must be able to succeed in delivering value.

It is still early days and we are bound to see new capital plowed into innovation. It will be interesting to see if this delivers the new billboards that I believe are needed or whether the smaller players will dominate in niche areas of the market.

So stay tuned! There is going to be some interesting activity in this area in the next few years.

By: Pete Fick

About the Author:

advertising network