64 Comments

Summary:

The social networking space is finally getting a long overdue does of reality. A weakening economy and the resulting strain on advertising revenue means the social networking space is finally getting a long overdue does of reality, combined with a slowdown in growth, means things are going to get a lot tougher going forward.

After years of hype, noise and funding, the social networking sector is finally getting a harsh, but necessary, sanity check.

Today there are numbers out from comScore that indicate plateauing growth for the big two — MySpace and Facebook — in the U.S. Last week, Revision3 canceled “SocialBrew,” an online video show dedicated to social networking. Meanwhile, Monster killed its Tickle social networking service (first reported in April by TechCrunch), following closely on the heels of CondeNast’s shuttering of Flip and Verizon’s decision to close up its virtually unknown network, which had managed to garner a mere 18,000 members. (Verizon has shifted its community to Facebook.)

And these just might be the tip of the iceberg, for there are way too many me-too networks out there failing to find the traction, and hence the volume, needed to grow their revenues. The lack of monetization will only accelerate this process.

Google CEO Eric Schmidt never misses an opportunity to dis the social networking sector, typically by pointing out how hard it is to monetize social media inventory. Which could just be his way of trying to excuse his company’s inking of an exclusive $900 million deal to serve up advertising on News Corp.-owned properties including MySpace.

But Schmidt’s motivation notwithstanding, what he says is true: In a recent report, eMarketer, a N.Y.-based market research agency, lowered its 2008 advertising estimates for U.S. social networks to $1.43 billion from $1.6 billion. They expect Facebook will take in $265 million and MySpace will bring in $755 million, down from earlier projections of $305 million and $850 million, respectively.

I’m not sure how they came up with these new projections, but let’s assume for a moment that they’re right. That means that MySpace and Facebook together will bring in $1.02 billion in U.S. ad revenue, which leaves about $400 million for dozens of other social networks. eMarketer also calculated revenue per unique visitor for some of the big five:

  • Google: $65.55
  • Yahoo: $31.25
  • Microsoft (MSN): $17.74
  • MySpace: $12.85
  • Facebook: $11.79

Now juxtapose these numbers against the U.S. traffic trends. Andrew Chen points out that U.S. visitor traffic for both MySpace and Facebook is beginning to show signs of maturing — and plateauing. The latest comScore data released today only reaffirms Chen’s point of view. Couple the new, lower revenue estimates with the flattening in the growth rate of U.S. visitors, what you end up with are tough times for social networking going forward.

Both MySpace and Facebook are seeing the bulk of their growth overseas, but that traffic is even harder to monetize than traffic in the U.S. Indeed, when it comes to making money on overseas traffic, with the exception of Google and Yahoo, most companies have had a mixed scorecard. What’s more, rather than a service unto itself, social networking is becoming just another feature on many web services.

All of these changes are going to continue to have a negative impact, and not just on all-purpose, also-ran social networks, but on the entire ancillary economy, including widget makers. (See our post on Userplane, the really big widget ad network.)

The way I see it, the market has shifted its focus onto niche social networks, such as those dedicated to sports, music, automobiles and pets. You know, sites like Dogster! They have focused, engaged communities, which means they can attract a higher amount of advertising dollars. (Liz came up with a taxonomy of social networks back in February 2007 that offers up an easy way to understand the nuances of the social networking landscape.)

Not only do they have a purpose, but they don’t depend on hit-or-miss behavioral targeting-based ad systems that many hope will one day turn social networks into a gold mine. After all, if you sell dog food, then everyone on Dogster is a potential customer. As for the rest of the sector, it’s only a matter of time before more companies go the way of Tickle, Verizon and CondeNast’s Flip.

Traffic Stats Graph comScore via Techcrunch.

  1. While it would be easier to monetize, I can’t see the niche site idea working very well because users would have to sign up at several sites to cover their different interests. Facebook and Myspace’s broader appeal give them a much larger base, and it seems like a tradeoff: easier to monetize versus easier to gain users.

    Share
  2. Niraj,

    That is true, though I am betting moves such as OpenSocial etc might be a step in the right direction and making it easier for us to sign-on elsewhere.

    Share
  3. Or Ning… If niche sites are indeed the trend of the future then Ning is very well positioned. The ID you use on one network works on all of them, so users get the convenience of a single login and the ability to choose from any subset of the networks.

    I don’t know if you have to re-add your friends for each network though.

    Share
  4. Is there any data about activity? Like page views per visitor? Ads needs pages as much as they do visitors.

    Share
  5. Om -

    your observations points are correct, however i think you’re a little overly-negative on these companies. they ARE pulling in $1B in revenue already — for a couple of services which barely existed 5 years ago, what’s not to like? and that’s without them even really developing much in the way of e-commerce services just yet.

    i think you’re guilty of measuring them against the Google yardstick, which is probably not the right one to use here…

    true, monetization on a per-page or per-person basis kind of sucks, but there’s SUCH huge volume i think we shouldn’t be TOO hard on companies which are clearly generating a ton of usage & not a small amount of revenue.

    both have probably been overhyped a bit in the short-term, however in the long-term i think there’s every reason to be optimistic.

    that said, i do think you’re correct that niche-focused social networks & services have plenty of potential as well.

    Share
  6. [...] Om Malik wrote a great post about the state of the business of social networking. Because of my side project that became this crazy 17 person company, I’ve been watching the [...]

    Share
  7. Dave, while I agree (I would take $1B :) ), the general perception was that social networking would take over, and valuations were based on this assumption. If that perception changes based on these numbers, where’s the massive IPO for Facebook (and others) that everybody (investors) expected? While 1B in revenue is a lot of money, it may not be the deal that people signed on for.

    Also, consider the basic proposition that you’re either going up or down. The plateauing may be a troubling sign as new channels for user attention develop (mobile?).

    Share
  8. It is only because there is no targeting in social networks. How can the advertisers and marketers tell who is viewing the page and why they are viewing that page. But users are open to targeted ads, but they also want to keep their privacy.. so it is currently a vicious cicle

    Share
  9. I agree with Om in that ‘the market has shifted its focus onto niche social networks, such as those dedicated to sports, music, automobiles and pets.’ It will be interesting to see how big players such as Facebook/MySpace will compete with sites dedicated to user’s specific interests, instead of generic. The time will come where an individual will want more than just casual conversation (chit chat) or updates on the party weekend in Vegas. Truthfully,…I believe that day has already come. It’s just a matter of time before implementation has its way and niche-focused sites rule the world (of Web 2.0 and beyond).

    Share
  10. Nice post Om. I believe the following:

    (1) OpenSocial, Ning and Flux solve the problem of niche networks requiring users to register in multiple places and remember those passwords (You already mentioned OpenSocial).

    (2) I believe you are right that “social networking” will mainly become part of existing websites, not standalone entities in the future.

    (3) I believe that the best monetization option for the advertising model is to allow users to specifically select what kinds of ads they are open to receiving.

    e.g. What would happen if I joined Facebook and I could select “autos, videogames, finance, movies” as categories?

    A user showing interest should be more valuable than trying to assume interest just because I mentioned “car” on my profile.

    Share

Comments have been disabled for this post