Social networking and ads-who’s paying attention?

First of all, Google announced some amazing numbers growing its revenue over 50% and its earnings around 17%.  That being said, investors in Google have high expectations and the stock fell in after hours trading.  One note that many in the blogosphere seemed to pick up on is the higher cost of traffic acquisition from partners and the fact that social networking is not delivering results as expected( read Between the Lines for more)

CFO George Reyes said social networking advertising is not monetizing as expected. When questioned further Sergey Brin, president of technology, said: “We don’t talk about individual partners or anything like that.” Brin noted some things were tried that didn’t pan out. While Brin won’t talk about partners it’s fairly obvious that MySpace is an issue. Google is obligated to pay at least $900 million in minimum revenue guarantees to MySpace through 2010. Later, the question was revisited again. He noted that Google also has Orkut and other social networking partners. “We have an incredible amount of this inventory,” said Brin. “I don’t think we have the killer best way to monetize social networks yet. We have had a lot of experiments (and some disappointments).”

I wouldn’t ring any alarm bells yet for social networking sites in general, but it is clear that there is much work to be done to get these sites to monetize.  We all know that social networking sites mean that people are there to interact with each other, not to click and view ads.  I remember one of our portfolio companies in the early days of the web had automated bots for instant messaging where we could insert ads into the stream of conversation.  It sure sounded like an interesting idea but people just did not care.  They were on the system to IM  not to view ads.   The sames goes with social networking sites.  I do agree with Sergey that there is tons of inventory and much more learning to be done to monetize more effectively.  With that much inventory every penny increase in effectiveness per page means big dollars.  Better and different ways of targeting will surely be one of the keys to understanding if there is a there there in making big dollars from social networking.  That means we should all closely follow MySpace’s hypertargeting ad system to see how it performs for the company over the next year as another data point for advertising effectiveness on social networks.

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