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Social Networks’ Failed Advertising Strategy |
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First it was Sergey Brin in Google’s January analyst call. Then AOL’s Randy Falco in an internal memo. Now Facebook’s new COO Sheryl Sandberg has made it unanimous. No one has a clue how to make money on the enormous traffic spiraling through Social Networks. Sandberg told CNN.com “How we get [to advertising profitability], I don’t think we know yet.”
To anyone moderately involved in the digital industry, these C-level comments are no surprise. As astonishing as the growth of Social Networks has been, their pitiful earnings have been equally stunning.
A few weeks ago, Wired’s Kevin Kelleher expressed the dilemma in terms of ad pricing. While robust in many online sectors, CPMs are trivial on the Social Nets.
Lookery, an ad network specializing in social media, offers display ads on MySpace, Facebook, and Bebo for only 13 cents per thousand times the ad is served (CPM); Yahoo’s average CPM is estimated at $13. Video ads on MySpace reportedly fetch just $25 per thousand showings; CBS charges $50 on affiliated sites, NBC as much as $75.
By my analysis, the Social Nets artificially inflate even these pitiful CPM figures. MySpace for example, has removed vast tracks of ads from it’s member profiles and other pages in an attempt to restrict inventory and buoy inventory prices.
Based on it’s current traffic, MySpace should be raking in $4.3 billion, but it’s minuscule $550 million in ad revenue last year didn’t even warrant a line item in the NewsCorp annual statement.
What’s the solution? MySpace may be rolling out its Music Service as a way to create higher-value ad inventory. It’s not a bad stop-gap strategy – but they have yet to come up with an idea to monetize their vast majority of current pageviews.
Facebook has launched the best effort so far — the Beacon social advertising platform. Members and privacy advocates simultaneously hated the idea. Wired’s analyst still mistakenly predicts that Social Advertising will be the ultimate solution…all evidence to the contrary. (I suppose in the absence of genuinely good ideas, you have to cling to the bad ideas or risk total despair.)
Social Networks Are Not Alone
Email is still the biggest online product in use today. Hotmail has about 220 million users. Yahoo! Mail has a reported 260 million users. But nobody talks about how widely profitable Yahoo! Mail is. Visit the site and you’ll see mostly unpaid house ads and low-CPM banners. Meanwhile, Yahoo! executives consistently tout display advertising, search monetization and media content as the company’s revenue drivers.
Some numbers: Assuming the average Yahoo! Mail user checks his email 15 times each month, and views an average of 5 ads, that would result in 19.5 billion ad impressions on Yahoo! Mail. It’s been reported that Yahoo! earns an average CPM of about $13 – applied to mail, that would result in $253.5 billion each month, or $760.5 billion quarterly.
Yahoo is reporting about $875 million in marketing services each quarter from it’s own site and properties. Assuming my conservative estimates, Mail would account for 86% of all of Yahoo’s onsite revenues. It would also exceed Yahoo’s offsite ad revenues by 26%. Clearly, mail isn’t earning Yahoo’s average CPM. More likely, Yahoo is receiving an average of $1 CPM for it’s mail inventory, or is artificially inflating CPM value by eliminating some of the inventory.
Five years ago, Instant Messaging was the hot communication application on the Web. But even at its peak, IM was never the revenue driver for either the market leaders, AOL or Microsoft. AOL bought ICQ in 1998 for $240 million in cash – but it didn’t recoup that expense through advertising. Instead AOL and Microsoft both viewed IM as a must-have utility for the success of their portal businesses – and they made money by driving their IM users to high-value pages like news, sports and entertainment.
Before IM there was chat – yet despite loads of low-value ad impressions, chat revenue never garnered headlines as a money-maker. Neither did message boards or news groups. In fact, it’s nearly impossible to find an example of a site that made significant revenues directly from any of these communication utilities.
Here’s my point, when the Social Networking bubble bursts, analysts will recognize Social Nets for what they are: a communications utility. They are a robust combo of mail, messaging, and personal profiles – innovative, but not earth-shaking. And these types of utilities have always underperformed as revenue generators. Instead, profitable businesses have historically used communications to attract users, who are then monetized via branded content franchises like news, sports and entertainment.
Where the Smart (and Not-So-Smart) Money Is
Analysts seem oblivious to historical truths. At WebProNews, Rich Ord has said “Social media is a different type of advertising platform from information-oriented websites and the two should not be compared.” I love this quote for its nostalgia value.
In 1999, respected analysts from the Wall Street Journal and BusinessWeek also justified ridiculous dot-com valuations based on the “potential” of Web audiences. When critics pointed out the failure of companies to monetize their traffic, the rallying cry was that web businesses were a different type of media company, and were not subject to traditional market valuations.
Now as then, common sense should rule… Is Facebook really worth more than Sun MicroSystems? Is MySpace worth more than Ford?
The assumption is that if users are worth money, then more users are worth more money. Theoretically, an infinite number of users are worth an infinite amount of money. It’s simply not true.
There is a point of diminishing returns in Web advertising. Enormous traffic creates a glut of inventory, which inevitably drives the value of ads down. The most highly valued inventory on the Web is branded, high-quality media content. It’s valuable because the content projects value onto the advertiser. When Target advertises on MTV.com, the brand benefits from MTV’s youth-oriented content, giving the brand a youthful shine. In contrast, utility inventory lacks the compelling context that advertisers need to help build identity and image, and in many cases may include negative images. The result is that advertisers have no cause to align their brands with products like Social Networks. Unlimited inventory and negative brand association is a perfect storm for low CPMs.
Social Networks mistakenly believe they can use more robust targeting to counter the lack of real content or context. Good luck to them. Assuming the practice can ever clear regulatory hurdles, all targeting will do is drive up the cost of keywords on AdSense – mediocre revenue gains limited to direct marketing. In the end, behavioral targeting will be a vast impressive technology, relegated to a bullet point on an ad network’s standard sales presentation.
In the meantime, Wired is still pronouncing, “the idea that ads can be a social experience is the industry’s best hope.” In my opinion, the best hope is to face the historical reality, and begin reshaping social networks as a traffic driver, rather than a revenue generator.
traffic driver to where?
Hey Greg: Traffic driver to branded, high-quality media content pages, where advertising traditionally makes most of its money. Like other communication utilities, the ultimate value of Social Networking will be to support a broader portal business. It’s not a sustainable business in itself.
Why do you presume that CPM is the relevant metric to evaluate, particularly for social networks, and who cares if the CPM is low? Impressions are not a good denominator for social networks - their inventory is essentially limitless. Facebook has 20 million users in the United States, of which 50% login on a daily basis and spend something like 30 minutes a day on the site. Moreover, discussions of CPM inherently ignore the quite real phenomenom of banner ad blindness. We know that users have developed mental shortcuts to avoid looking at online ads, see e.g. http://www.useit.com/alertbox/banner-blindness.html. That’s why smart advertisers buy on a CPC basis.
The reason why CPMs on sites like NBC are so high is because traditional broadcast advertisers, who have basically no accountability to measurable outcomes, are purchasing display ads online and have no idea what a reasonable CPM is (or if we want to talk crazy, CPC or CPA). Direct marketers who actually measure results and test their tactics would never pay the $50 CPM for NBC’s affiliates - there is absolutely no way to get that much value out of mass display ads.
There is no point in comparing CPMs between search engines and the general web. Any discussion of CPM for Google, Yahoo, or MSN needs to differentiate between search and display ads. The high CPM value of search ads is strongly justified by their value to both the consumer and advertiser, and is exhibited by the high CTRs and low CPAs. Conversely, display ads do not contribute much value to either party, which explains their lower pricing.
The key factor with Facebook (imo) is that their self-service ad management system has really only been usable since the “Social Ads” upgrade was released back in October. Prior to that their ads had a set price of $2 CPM, which was far too high based on the CTRs, did not effectively harness their targeting data, and was inconveniently designed for repeat advertisers. They have gradually shifted to a more restrictive ad format as well. Put that all together and Facebook’s ad platform has existed in usable fashion for less than 6 months. It’s going to take some time for advertisers to exploit its features and learn how to use it effectively.
There are also several additional technical features that can be added to Facebook’s ad platform to reduce risk on the part of advertisers: frequency capping, day parting (or advanced scheduling), behavioral targeting, integrated conversion tracking, virality tracking, an ad purchasing API, etc. FB definitely hasn’t reached the ceiling in terms of ad management features.
Personally I think Facebook should integrate with Google’s demographic bidding via OpenSocial and gain exposure to the huge base of Google’s advertisers. That would drastically decrease the human capital investment required to adapt to Facebook’s unique advertising system, which is indicative of the unmanageable variety of ad formats for online advertisers, and will bid up the prices. With Google’s approved purchase of DoubleClick there will be an influx of major corporate ad buyers into Google’s advertising network that will further expand their network’s demand for targeted inventory.
What is cpc?