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Social Networks Wont Replace TV

2007.12.02

You may have heard that social networking is the wave of the future.

News Corp.’s (NWS) MySpace and privately held Facebook are attracting millions of users each month. Google (GOOG) is trying to cash in on the social networking craze by partnering with the likes of MySpace, Bebo and other top social media companies through its OpenSocial initative. And Microsoft (MSFT) spent $240 million last month to buy a 1.6 percent stake in Facebook, a price that values Facebook at an eye-popping $15 billion.

But is there a bubble brewing in the social media market? One industry expert thinks so. I sat down to chat with Jim Nail, the chief strategy and marketing officer of Cymfony, an online advertising analytics firm that was acquired by media research company TNS Media Intelligence earlier this year.

Nail, a former analyst at Forrester Research, said he thinks that some advertisers are making the mistake of thinking that social media will be the answer to all their advertising needs, and that MySpace, Facebook, YouTube and others of their ilk will become the ABC, CBS and NBC of the 21st century.

“Marketers have finally given up the illusion that TV is the magic solution to everything,” Nail said. “The problem is marketers want to look for the next magic solution and social media is not it.”

Nail argues that while consumers will probably continue to flock to social media sites, he’s not sure that any of them will really be able to generate large amounts of revenue from advertising. For one, he thinks that there are too many social networking sites out there chasing a finite stream of ad dollars.

“There are too many companies. So from that standpoint, there is a venture capital bubble in this area. There will have to be more consolidation,” he said.

Nail added that trying to handicap who the social networking leader will be several years from now is extremely difficult given how much change has taken place in the business in just the past two years. What’s more, fickle younger Web users have shown a tendency to flee one social network for the next once something cooler comes along.

“Where was Facebook a year ago? Where was MySpace two years ago?” Nail said. “This area is changing so fast that it makes it a harder market to call. People might just flock to the next big thing.” He pointed out that early “leaders” in social networking, such as Friendster, Tripod, Angelfire and Geocities, which Yahoo (YHOO) bought in 1999 for $3.6 billion, are no longer leaders.

This is not to say that MySpace and Facebook are doomed to fail. But the social media leaders of today may not necessarily be the sites where all the tweens, teens and young adults are hanging out tomorrow.

There’s also the issue of whether or not users of social networking sites will really tolerate advertising. People may have grown used to the idea of free entertainment being supported by advertising. But what about profile pages, messaging and other forms of social communication?

“Presumably people are going to these social networking sites because they want to get away from the clutter of advertising on every other medium,” he said.

Now before you accuse Nail (or me) of being a dot-com bear, he’s not predicting a spectacular crash for overall online ad spending. Like others I’ve spoken to recently, Nail believes that online ad spending should hold up well in 2008, even in the event of an economic slowdown or recession. And that’s mainly because Nail believes people will continue to seek out the Web for both leisure and business.

“The current trend is unequivocal, inexorable and irreversible,” he said.

Nail said another big difference between 2007 and 2000 is that big brand-name companies realize the value of online ad spending, and would be likely to spend more on Internet campaigns and pull back on TV, print and radio if the economy weakens further. Earlier this decade, online ad spending was supercharged by venture capital-funded startups that were blowing their IPO proceeds on banner ads.

“Now it’s the Cokes, P&Gs and GMs of the world. Real brands are fueling online ad spending,” he said. “In the late 1990s, there was this notion that Internet ad campaigns were more trouble than they were worth. That’s no longer the case.”

But that doesn’t mean that all online ad-supported companies will benefit. Nail sees search advertising, not social media, remaining the online ad of choice for many companies since it is easier to quantify the impact of a search ad on sales.

That’s why, when I asked Nail specifically about whether he thought Microsoft was getting a good deal with its Facebook investment, he just shook his head.

“Few companies are spending serious ad dollars yet on social media. I don’t think social networks will ever be a huge dollar figure of media spending budgets,” he said.

And there’s the Catch-22 for big social networking companies. A completely free model won’t be viable because users aren’t going to pay fees to manage their profile pages. But if users rebel against advertising, it may be difficult for the social networking companies, even the giants such as Facebook and MySpace, to justify their current frothy valuations

 

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