Are social networks dragging down CPMs?

My pal Mark Dempster over at Sequoia sent me a study on CPM's dropping.

The key finding here, in my mind, is what I've said all along: social networks are great for traffic but horrible for advertising. Social networking sites are probably not going to figure out a way to insert advertising into people's conversations--just like message boards, chat rooms, and IM didn't.

Again, communication services are amazing for traffic, but they suck for advertising. High CPMs are going to be reserved for vertical content and search, where people are in the cognitive mindset to consume sponsor messages, which when correctly aligned are perceived as content.

"Among the verticals, Social Networking led the plunge with monetization dropping 47 percent, from 37 cents in March to 19 cents in April, below January lows of 22 cents. Entertainment monetization dropped 17 percent from 40 cents in March to 33 cents in April. Gaming and Sports were down marginally (4 percent and 5 percent, respectively). Technology remained relatively flat at 83 cents in April vs. 82 cents in March, but is still off January highs of 92 cents."

If I was running a social networking site like MySpace and Facebook I would REMOVE ADVERTISING and drive all the traffic I could from the social network to niche content sites and search where it monetizes really well. This way folks feel like there is no advertising on Facebook/MySpace and they spend more time there.*
JasonNation: What do you think social networking sites should do to monetize their traffic?

* No, I'm not asking to get bought by Facebook or MySpace... I'm just pointing out what I think the right strategy is for social networking sites: build traffic and dump it to places that make money.

May 15th 2008 1:17PM
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1. Hi Jason - Great topic/question about monetization of Social Networking websites.

I agree that though social networks drive plenty of traffic but they don't really do well in conversion. This is obvious as users are just interested in clicking on friends and read-about/interact-with them. And that sucks for advertisers who wish to sell/do something with users.

Here are a few ideas I think social networks should explore:

1) Create "Branded" interest groups (as apposed to user generated groups) and have a manager/moderator to overlook each group -- feed content, activities and then of course relevant/targeted advertisements!

2) "User Recommendations" - add a feature that allows users to recommend something useful to friends OR even the opposite approach whereby a user requests his/her friends to recommend something. When showing those recommendations (books/music/events/etc), and then show the relevant/targeted advertisements!

3) "Intelligent Bot/Buddy" - add a cool virtual friend embedded to every account. This Bot/Buddy automatically tracks the conversation/messages/activities that you contribute in your network. With that information, your "Virtual Buddy" reminds you that you have been talking too much about "fill_the_blank" and it recommends some stuff (targeted ads) that you might want to know. NOTE: you might want to do it more cleverly without storing data about user activities to protect privacy!

-- Cool heh?

I have more. I am currently working on AdExcel, a new startup that is doing something really innovative in the online advertising space. We are entering closed alpha this month and will be launching soon. Perhaps we could talk more about it if you like :-)

Warmest,

Darren

Posted at 5:40PM on May 15th 2008 by Darren Lee

2. Driving people to click through to a site with higher eCPM will usually back out to less eCPM on the main site in my experience / opinion. Its best to offer up the inventory to performance based marketers (which they are starting to do) who can bid for the traffic by PPC or CPA and are experienced with the arbitrage. I am biased but I think fat CPMs with no ROI protection will fade away and they people will be forced to work on a CPA if they already arent because otherwise their inventory goes to waste. After the big agencies allocate their budgets to premium sites and inventory, most of the big online ad budgets rest with lead gen / CPA companies.

I might test slowly with CPM but lots of traffic will go unused until I can back it out on an eCPM. If they take it on a CPA from the start then they run as much as they want based on the eCPM they get and working campaigns can get active and rolled out faster.

Posted at 6:31PM on May 15th 2008 by Jim

3. social networks should start creating content on their own and only sell advertising on those pages.

Posted at 7:54PM on May 15th 2008 by Hashim Warren

4. Darren I have 1 answer for all three of your answers. A niche Social Network. Facebook is doing it wrong and better evolve or lose members. I know you think I am crazy, but these social networks, niche included, are one trick ponies. One type of revenue (advertising) and 1 type, in general, added value 'connecting with friends'. This model is so web 2.0. - I have solved this problem and will change the world on how social networks will be in its next evolution. - Because our market is people with money and it's a specific niche target, my team and I have decided to ditch CPM & CPA altogether. We're going to charge X amount for running your banner for X amount of time giving you weekly analytics. Risky? Not really if you knew my niche market. Plus understanding branding vs advertising and using that to your advantage is a good thing; because you should know advertising doesn't build credibilty.

Posted at 10:54AM on May 16th 2008 by Brandon

5. たまに拝見しています。

Posted at 9:48PM on May 18th 2008 by 名古屋　風俗

6. They key is forcing people to interact with the ad by making them want to do it. The best Facebook and Myspace applications do this well. Facebook should make its own system that mimics apps like My Aquarium. They would get an F for originality, but an A for making money.

Remember when Facebook made $20 million in a few months by giving users the ability to buy $1 graphics for charity? What they did was have 100% of the proceeds go to charity for the first month, but after that first month, they decided to pocket all the money for themselves. It added up to around $20 million rather quickly, and most users apparently didn't realize that the $1 graphic payments weren't going to charity anymore. The graphic buying system spread virally because it was all about users buying graphics for their friends. Facebook needs to do things like this more often.

If I was the CEO of Facebook, the first thing I would do is hire a real CEO. No offense to Zuckerberg, genius kid obviously. But companies like Google had to hire a real CEO (in fact they were forced to by their VCs) in order to make it to the big time. Steve Jobs hired John Scully etc. etc. You can either try to cross the Atlantic in a raft, or you can use a cruise ship. I think what's going to happen is that when it looks like Facebook really isn't making enough, the Facebook VCs will flip out and force Zuckerberg to hire a CEO.

Posted at 10:48AM on May 19th 2008 by Will

7. There are now thousands of social networks that cater to a whole variety of subjects. These smaller, focused sites allow users to connect with like-minded people and give advertisers targeted demographics. Niche social networks are also good for marketers who have a product or service they want to promote that relates to a particular interest. A good place to find such sites is a search engine that caters specifically to social networks such as http://findasocialnetwork.com

Posted at 10:51AM on May 19th 2008 by Marques

8. Off topic, but .. I'm a big TWIT fan. The episodes are grossly better when you are a guest. I find your comments insightful and right on the mark. The conflict with Dvorak is interesting. I'd imagine it's a communications challenge dealing with an old war horse that is resistant to change and mostly stuck in the 20th century.

Keep up the good work and don't let the friction dissuade you!

Posted at 2:46PM on May 19th 2008 by Mike Briggs

9. Social networks should consider a rev share with users who clickthrough and convert through their networks in order to incentivize the user base to click through ads - rev share only on conversion. Run smart affiliate marketing components and collect psychographic data to market wisely and increase the value of the inventory. whatever.. some ideas.

Posted at 2:09AM on May 20th 2008 by mig

10. Be interesting to see what effect the latest facebook makeover has.

Posted at 4:48AM on May 22nd 2008 by Dan Horton SEO

11. I think the surge in social networks will subside given the fact that most depend on click through ads for funding. This will be a major issue for them as users are becoming more and more "blind" to PPC ads. The only way they can survive long term is to charge for their services. Or develop top-notch ad campaigns with major businesses as apposed to low-key click client ads.

DevManiac,
Social Network Graphics Management

Posted at 2:27PM on Jun 24th 2008 by DevManiac

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