How To Monetize Social Networks

Give Rupert Murdoch his due. When the News Corp. (NWS ) chairman approved a $580 million deal to acquire MySpace in the summer of 2005, he was way ahead of the pack. Today, hundreds of millions of people around the globe have embraced these digital water coolers, using them as a means of self-expression or as a way to keep in touch with friends. But now the pressure is building for MySpace to prove it can be the cash cow that Murdoch and others are betting on. MySpace, still by far the largest social network, has lost some of its mojo lately as competing networks spring up like dandelions after a rain shower, crimping its growth.
Most important, social networks have yet to figure out a business model. Advertisers, for instance, aren't sure that social networks can become a great platform for their pitches. "Social-network advertising is still a work in progress," says Debra Aho Williamson, a senior analyst with research firm eMarketer.

Murdoch's challenge is to transform the Web phenom into a digital media powerhouse capable of richly monetizing eyeballs without driving off the very users who made it popular. Even MySpace executives concede they're winging it. "I don't think our monetization strategy will be a prize-winning Harvard Business School study," says Jeff Berman, general manager of a new MySpace TV unit.

The race to wring money out of MySpace's giant audience is all the more urgent because Facebook, the fast-gaining No. 2 network, is expected on Nov. 6 to unveil its own advertising strategy. On Oct. 24, Microsoft said it would invest $240 million in Facebook, reportedly beating out Google and giving the site a staggering $15 billion valuation.

Besides the big social networks like Facebook, hi5.com, and Bebo, new niche efforts are emerging. These outfits, with names like Geni and Dogster, are less about keeping in touch with friends than connecting with family or communing over mutual interests. Venture capitalists this year alone have poured about $250 million into 34 different social networks. And all kinds of places, from USA Today to Dwell magazine, are integrating social-networking techniques into their sites.

STOP BY, STAY A WHILE
That surge in new networks is one reason Bear Stearns analyst Spencer Wang sliced his first-quarter earnings estimates for News Corp. on Oct. 18. Wang noted that in the third quarter, MySpace's U.S. audience showed its first-ever quarterly decline, after peaking at 70.5 million in June. "We are not fully convinced that MySpace can maintain its lead," says Wang. Moreover, MySpace users are not lollygagging on the site the way they used to--a key metric for advertisers. MySpace users spent an average of 3 hours and 13 minutes a month on the site in the third quarter, down 26% from a year earlier. Meanwhile, users spent 3 hours and 33 minutes on Facebook, up 23% for the year.

Social networks have put most of their faith in advertising. But people don't go to MySpace to find products or information. Users are so engrossed with talking to friends and posting party pictures that they pay little or no attention to the ads. So ad rates on social networks are much lower than prices for search keywords or traditional ads--$1.86 per thousand views for MySpace, Merrill Lynch says. That compares with as much as $30 per thousand for prime-time TV. "Standard display ads--and I don't care how much targeting you do--it's not working well," says Ian Schafer, president of online ad firm Deep Focus.

Media giants such as Warner Bros. and NBC have set up sites on MySpace to promote their content. But ad providers say some big consumer brands are leery of running ads beside material created by users. "Almost every single client we have says, 'Do not run my ad on a social network," says Tim Vanderhook, CEO of ad network Specific Media.

MySpace is working to change that perception. It is rolling out a new system with computer algorithms that glean data about its users. That should produce ads that are more closely targeted to users' interests and make advertisers more eager to spend money on the site. "We're very excited about the prospects of this," says Peter Levinsohn, president of MySpace parent Fox Interactive Media. That project is crucial if Fox Interactive is to generate a third of News Corp.'s earnings growth in the current fiscal year, ending next June. Merrill analyst Jessica Reif Cohen expects Fox Interactive--of which MySpace is the largest part--to earn $239 million on operations, up from $33 million last year.

Loading up on ads can backfire, though. MySpace already turns off some members by putting as many as nine ads on a page. "I really hate it," says Vinh Pham, a 24-year-old Web developer who now spends more time on Facebook than MySpace because of the ad deluge. "You have to see, like, 100 ads just to do anything on MySpace."

GOING HOLLYWOOD
Meanwhile, MySpace co-founders Chris DeWolfe and Tom Anderson are spending big money to turn MySpace into a digital media juggernaut. In late October, MySpace announced the creation of a gaming site, as well as a deal with Sony BMG Music Entertainment to share revenues generated from Sony content displayed on MySpace's music pages. The most prominent effort came in June when it launched MySpace TV, which has gained traction by adding professionally produced video. MySpace also has plans to create a version of the video site for cell phones. "In some senses, we're becoming Hollywood's digital playground," says Berman.

But many analysts and technologists question how many users want this type of content and how much money MySpace can make from its investment. Yahoo! recently retreated from its strategy to produce more original programming. "The Hollywood playbook has not adapted well to the Web," says Reid Hoffman, CEO of professional network LinkedIn and an investor in Facebook.

For now, MySpace's biggest revenue source is a three-year, $900 million deal signed last summer that makes Google the site's exclusive ad provider. MySpace has to deliver a minimum amount of traffic.
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