From Business Week
Copyright Business Week
Generation MySpace is getting fed up
By Spencer E. Ante and Catherine Holahan for Business Week
Published 7 February 2008
Check out Spencer's blog at Creative Capital
If you want to socialize with Chris Heritage, you won't find him on
Facebook. The 27-year-old Port St. Lucie (Fla.) business analyst joined
the social network last year after his buddies bugged him to get an
account. But he soon became fed up with the avalanche of ads,
especially those detailing what his friends were buying, and he quit
the site in November. Now, Heritage expresses himself through a blog,
happy to pay $6 a month to publish on a promo-free Web site. "It's
worth it to not have to look at the ads," he says.
Uh-oh. Social networking was supposed to be the Next Big Thing on
the Internet. MySpace, Facebook, and other sites have been attracting
millions of new users, building sprawling sites that companies are
banking on to trigger an online advertising boom. Trouble is, the boom
isn't booming anymore. Like Heritage, many people are spending less
time on social networking sites or signing off altogether.
he MySpace generation may be getting annoyed with ads and a bit
bored with profile pages. The average amount of time each user spends
on social networking sites has fallen by 14% over the last four months,
according to market researcher ComScore. MySpace, the largest social
network, has slipped from a peak of 72 million users in October to 68.9
million in December, ComScore says. The total number of people on such
sites is still increasing at an 11.5% rate, but that's down sharply
from past growth rates. "What you have with social networks is the most
overhyped scenario in online advertising," says Tim Vanderhook, CEO of
Specific Media, which places ads for customers on a variety of Web
sites.
Wishful thinking?
Advertising on social networking sites is growing fast. Last year
global ad spending on these sites shot up 155%, to $1.2 billion, says
researcher eMarketer. This year, eMarketer expects it to jump 75%, to
$2.1 billion. During its Nov. 4 earnings call, News Corp. (NWS) gave an upbeat forecast for Fox Interactive Media, which includes MySpace.
But the forecasts for torrid growth may prove unrealistic. Besides the
slowing user growth and declining time spent on these sites, users
appear to be growing less responsive to ads, according to several
advertisers and online placement firms. If advertisers can't figure out
how to reverse these trends, social networking could end up as a niche
market in the online ad world, smashing hopes and valuations across
Silicon Valley.
The current strength in advertising on social networks may be
exaggerated by guaranteed ad deals and hopeful experimentation. Google (GOOG) and Microsoft (MSFT),
in hot competition with each other, promised a number of sites a
minimum amount of advertising revenue in exchange for the exclusive
right to place ads on those sites.
But the early results from those deals are mixed. On Jan. 31, Google
said it didn't generate as much revenue from social networking ads as
expected. Google, which has a $900 million guaranteed deal with MySpace
for placing ads alongside search results, says existing ad approaches
aren't working well on social networks so far. "I don't think we have
the killer, best way to advertise and monetize social networks yet,"
said Google co-founder Sergey Brin.
When News Corp. reported its earnings, it said revenues for Fox
Interactive Media surged 87%, to $233 million. But $62 million of that
came from Google's guaranteed deal with MySpace. It's unclear whether
Google, which ad experts believe is losing money on the deal, will sign
similar agreements in the future.
Another big slug of ad revenue is coming from companies
experimenting with social networks because they are such a popular new
medium. But for some, the results have not been encouraging. Many of
the people who hang out on MySpace, Facebook, and other sites pay
little to no attention to the ads because they're more interested in
kibitzing with their friends.
Social networks have some of the lowest response rates on the Web,
advertisers and ad placement firms say. Marketers say as few as 4 in
10,000 people who see their ads on social networking sites click on
them, compared with 20 in 10,000 across the Web. Mark Seremet,
president of video game publisher Green Screen, stopped advertising on
MySpace last spring because of a 13-in-10,000 response rate. "It's
really hard to make money on that anemic click-through rate," says
Seremet.
MySpace and Facebook recognize the issue but say increased targeting
and other innovations will spur users to pay more attention. Last fall,
both rolled out programs allowing marketers to pitch products to people
in hundreds of categories of interest, such as fashion and sports. News
Corp. President Peter Chernin said on Feb. 4 that response rates on
MySpace improved as much as 300%. Owen Van Natta, chief operating
officer at Facebook, says there will be more experimentation in the
future. "There's so much innovation that needs to happen," he says.
But there's a catch-22: More aggressive ad programs can lead to more
frustrated users. Ryan Lake, 34, just left MySpace because of the ads.
"There are so many, and they are getting more and more obtrusive," he
says.
Facebook, the second-largest social networking site, which continues
to grow rapidly, introduced an ad program in November, called Beacon,
that alerted users to the purchases of friends in hopes of spurring
sales. More than 75,000 Facebook members signed an online petition
against the effort. Carol Kruse, Coca-Cola's (KO)
vice-president for global interactive marketing, says that while she
thinks social networks present a big opportunity, Coke is avoiding
Beacon for now.
MySpace has had complaints, too. Nina Pagani, a 20-year-old New York
student, grew furious last year when MySpace began automatically
posting on users' home pages notifications of friends' favorite
products. "Your personal MySpace page became an advertisement," she
says. Pagani, a five-year MySpace member, deleted her account in
December. "It caused too much drama in my life," she says.