Advertising on Social Networks: The Third Wave

According to eMarketer, ad spending on social networking is a boom industry. It’s set to grow, in the U.S. alone, from $900 million this year to $2.5 billion by 2011. That’s pretty steep growth. Clearly, the explosion of all these sites creates a whole new crop of inventory for us advertisers to fill up with banners, buttons, and blinking lights.

But that really wouldn’t be right, would it? Social networks are growing to be something much more than just new exposure opportunities for advertisers. With the way technology is developing, we may have an opportunity to operate inside social networks in some new, very compelling ways. Essentially, the network is becoming a platform. That invites us all to think about building for the medium, using its intrinsic nature.

Reach, Frequency, Depth, and Engagement

Take Facebook as an example. This social network began life as a closed community of college students. It grew to allow high school students and, now, everyone. Opening the doors was evidently a fantastic move. Membership leapt from 14 million users to 26.6 million users, according to comScore. Not only that, but people spend an average of 186 minutes on the site, per visit. For a quick comparison, “The Godfather” was only 175 minutes long. These people are involved with this site in a significant way.

The big question, of course, is whether this momentum will continue. Certainly some people think the transformation from closed to open network will disenchant some early settlers. And an open network may be used in a distinctly different way than a closed one. However, there are several reasons to believe social networks like Facebook are only going to get stronger and bigger; the primary one being they’re becoming more useful.

APIs Again

Thing is, the people who will make social networks more usable aren’t the ones who work for the social network companies; they’re the ones who work with them. Facebook pushed the envelope pretty far this year by releasing a breakthrough new API (define), allowing developers unprecedented abilities to build new applications on top of Facebook.

Say you’re a developer and you have a truly clever new idea for a photo-sharing application. You could build the thing from scratch, then look for users. Or you could build the thing on top of a very robust platform and have it live in an environment where…what were those numbers again? Oh yeah: 26.6 million people spending more time with you than the godfather.

To make things more appealing, Facebook isn’t charging people to use the API. It sees the opportunity to increase those numbers even more. Facebook already has a photo-sharing app, of course. But rather than come up with a new version (or simply an alternative version) to help solidify its user base, it allows someone else to capture that opportunity.

Two New Ad Models

There are two new ad models that are introduced with open APIs. More precisely, there’s one new ad model and one new ad opportunity. Let’s talk about the opportunity first. I keep focusing on Facebook, but it’s just a bold pioneer here. I imagine others will follow its lead in short order.

The opportunity is for placement. The new applications built on the social networks can have regular, everyday ad space built into them. This may be the way a developer decides to make money from her photo application. Clearly, though, it’s just new inventory.

But what if there’s a photo-sharing application built specifically for the skateboarding community? Or moms? Or any other interesting community? Advertisers may have the opportunity to place ads or create sponsorships with these community-focused bits of functionality and still get scale because they’re created on a social network. It’s like built-in targeting.

With the new model, however, we get the third wave of advertising on social networks. The first wave was simply placing ads, taking advantage of the rush of consumers visiting these sites. The second wave was creating spaces and pages for a brand, product, or spokesperson (real or imaginary).

This third wave will have more to do with building functionality on top of the network, as opposed to placing ads inside it. The opportunity to more deeply integrate the brand with the experience has always been a drive for online advertisers. Since the early days of the Web, we’ve tried to get away from the notion of placing ads. In fact, all that language (“insertion order,” for example) are holdovers from offline.

Smart advertisers have become more focused on thinking about the spaces in which they encounter consumers and making that experience better. The challenge, of course, is to make it better in a way that builds brand value. But open APIs and the chance to create branded functionality will be too appealing to ignore.

This opportunity will drive spending on social network advertising. Certainly we’ll continue to see home-page placements and movie-character profiles. But the big spends (and the big successes) will be from those who add real value to the network and, as a result, to their brand.