Social Site Ad Revenue Disappoints, Insiders Remain Positive

Recent earnings reports, research and punditry bode ill for social network advertising. Yet despite heightened concern about lackluster revenue predictions and monetization of sites like Facebook and MySpace, observers and insiders still see great promise.

Yesterday, eMarketer reduced its forecast for U.S. online social network ad spending. In December, the research outfit predicted the category would account for 5.7 percent of all U.S. online ad spending this year, and continue to increase each year, hitting 6.4 percent or $2.7 billion in 2011.

But the landscape looks rockier today. Based on earnings data from MySpace owner News Corp. and eMarketer’s original research, the company lowered that estimate, predicting revenue from ads on social networks would account for 5.5 percent of all U.S. Web ad spending in 2008, reaching a peak of 6 percent in 2009. Rather than continuing to rise, that percentage is expected to decline to 5.8 percent or 2.4 billion in 2011 and deflate further to 5.1 percent or $2.6 billion by 2012. The firm also reduced its worldwide social network ad forecast.

“The advertising side of the business just hasn’t gotten there as fast as everyone thought it would,” said eMarketer Senior Analyst Debra Aho Williamson. “It’s taking longer and the slowing in the economy isn’t helping.”

Earlier this week publishing services firm PubMatic reported a decrease in average effective CPM rates from 37 cents in March to just 19 cents in April. The drop followed a trend for large sites attracting more than 100 million pageviews per month, which saw an average decline from 38 cents in March to 18 cents in April.

Overall, the company found effective CPMs slid from 49 cents in March to 38 percent last month. “April is a good bellwether month to look at relative to CPM strength,” said David Smith, CEO of integrated media agency Mediasmith, suggesting by this time, annual ad budgets are solidified.

Citing overall online ad revenue softness, Smith believes social networking Web sites may have experienced a steeper revenue decline because they’re less proven as ad vehicles. “So they’re going to feel it more than the homepage on Yahoo,” he said. Both Smith and Williamson suggested social network ad budgets have been cut because they’re still considered experimental.

Last week, News Corp., owner of MySpace parent Fox Interactive Media, reported FIM revenue would fall 10 percent short of fiscal year projections. “The online ad models that have driven the Internet economy in the past need to be refined for the social media universe,” said News Corp. President, COO and Director Peter Chernin during the firm’s quarterly earnings call with investors.

Digitas clients are cautious, yet greatly interested in understanding how to leverage social media, said the agency’s EVP Global Media Carl Fremont. Social media is “so nascent that it’s hard on a percentage basis to even understand what increases there are,” he said.

Google too has struggled to monetize social networking inventory. During its Q4 2007 earnings call in January, the company indicated dissatisfaction with revenue generated from its advertising on social networking sites. Google CFO George Reyes said its social network ads were “not monetizing as well as expected.” Regarding social networking inventory in Google’s network, co-founder Larry Page continued, “It varies quite a bit how well we monetize, based on a number of factors, some of which we understand, some of which we don’t.”

“Social networking is going to become something less of a destination,” said Williamson. “I think it will become a feature or interactivity or Internet browsing experience,” she added, noting, “I think that impacts the ad revenue of specific destination sites.” Williamson believes MySpace’s recent decision to allow users to access their profile data on partner sites indicates the company recognizes this reality.

In an effort to boost CPMs on MySpace, FIM expanded its HyperTargeting ad system, which employs user profile data to better target display advertising. News Corp.’s Chernin told investors last week hyper-targeted campaigns generate double the CPM rates of non-hyper-targeted campaigns. “Orders with HyperTargeting are about 60 percent larger,” he continued, adding that brand name advertisers like Chevrolet and retailers TJ Max and Target use the targeting platform. FIM also claims 75 percent of repeat advertisers have used the system twice or more.

Williamson called the targeting system “very smart,” because it increases relevance of ads. However, she told ClickZ News, “It’s pretty obvious that banner advertising doesn’t work on social networks…. What has been the challenge has been trying to come up with models that do work.”

Mediasmith’s Smith affirmed the notion. “We don’t buy a ton of their typical banner inventory; we try to find other ways to advertise in social networks.”

“It’s too early to write obituaries for any ad model in the social media space, except for those which are blatantly intrusive or interruptive,” said Nielsen BuzzMetrics CMO Pete Blackshaw, a ClickZ columnist. “Brands need to think hard about the optimal social media mix model between buying impressions or clicks around engaged consumers versus nurturing organic advocacy in this expression rich environment.”

Like countless other advertisers, Smith’s firm pays for ads on social networks and exploits their communal environments for free or less expensive viral efforts. He concluded, “Maybe they need to figure out how to monetize the viral side of their equation, because it does have value.”

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