What can Facebook, Myspace et al do for ad-funded revenue models?

Microsoft’s hostile takeover attempt of Yahoo! highlights the massive importance that is now attached to online advertising. Microsoft hopes that it may be able to break Google’s hegemony in the world of ad-supported content, where nine out of ten people would rather be bombarded with ads for a free video, rather than pay anything. But in an age where people have increasing control of content distribution, thanks to sites such as YouTube, are ad-funded revenue models on the wane?

The cracks are starting to show – Google’s fourth quarter performance for 2007 revealed a growth slowdown - 17% to $1.2bn (£602m), compared to 46% in the third quarter. Analysts who were expecting Google to carry on performing like England’s 2005 Ashes-winning cricket side, (surpassing all expectations), have seen a performance closer resembling England’s 2007 football team (disappointing). Google have however confirmed that the blame lies with the phenomenon that has been filling column inches throughout 2007 and divides opinion to a slightly lesser degree than Marmite - social networking sites.

George Reyes, chief financial officer at Google, has gone on record as saying: "We have found that social networks are not monetising as well as we were expecting."

The problem appears to lie in the fact that those who are inclined to tolerate ads in return for free content want them to be properly integrated into the websites, with the right “look and feel”. The Experian-Hitwise 2007 Report, The Impact of Social Networking in the UK, has found that social networking’s reliance on user generated content means the sites are seen as - and desired to be - relatively free of corporate content and advertising. The report states that the “polluting” of social networking sites can drive users away; such is the vast range of choice in the market. I, myself, have experienced this, when my Myspace page was polluted with adverts for Macy’s handbags and other such irrelevancies, I felt I had to get out, and joined Facebook.

Indeed, Facebook is a prime example of how social networking can help ad-funded models, i.e. if they are implemented in the correct way. A quick glance at my Facebook News Feed and in between - “you have been tagged 34 times in the album ‘Embarrassing photos that you don’t want your boss to see’” and “all your friends have joined the group ‘Supercilious carrots will one day rule the Earth’” is an ad for t-shirts; I like t-shirts. Even better, it is an ad for a Janis Joplin t-shirt.

This is the perfect example of what the future holds in terms of successful ad-funded models on social networking sites. The ad is integrated perfectly into Facebook’s interface and is a great example of highly targeted search marketing, whereby the information that the user inputs about his likes, dislikes and what have you, is used by marketing companies to target ads. This is probably the greatest use social networking offers to ad-funded models, especially as their search features are expected to improve greatly.

On the other hand, Badoo, no.2 on Google’s “fastest rising” list, behind the iPhone, is a social network that is proudly ad-free, and is very popular in Latin American countries, France, Spain and Italy. It offers a service for attention hounds called Rise Up, where for $1, £1, or €1, depending on your location, your profile can appear on the front page of the website. While this may sound like an invitation to be stalked, sensitive bits of information can be hidden and ‘undesirable’ profiles blocked. Neil Bryant, the MD, claims that 20% of its 12.5m users use the Rise Up function once a month. I am rather skeptical about this taking off in the UK however, at the moment it has just 100,000 users, Facebook is so dominant with 37% of the market share of course we have the great British reserve. Even if it does take off, it will only represent another option in the crowded social networking marketplace that will continue to both help and hinder ad-funded models by its very nature.