Socials must soon lower their sights

The biggest story in online media this year has been the rise of social networking websites like MySpace and Facebook. The end of the year could be dominated by a different one: how a slowdown in online advertising pulls the rug from under their feet. The one group to gain could be advertisers.

Yahoo! chief executive Terry Semmel gave the clearest warning yet last week, when he said that growth in advertising from financial services and car companies was slowing down. Yahoo!’s share price fell 11% as a result, highlighting how closely linked the prospects of online companies are to advertising.

It’s bad news for Yahoo! but even worse news for social networking sites desperately trying to find ways to fund their popular, but free websites. Until now advertising seemed like the best bet.

Semmel’s warning wasn’t the first. Earlier in the summer one of the largest digital agencies in the US, Digitas, warned that its travel and car clients were cutting back on spending.

Despite the warnings, Yahoo! is being linked to a $1bn (£525m) purchase of Facebook and is also rumoured to be eyeing up a deal to buy Wretch, its biggest challenger in its third largest market of Taiwan. Viacom is also expected to pay large amounts to buy one of the new generation of websites.

The reason they are attractive is because they are grabbing audience share from the established websites. Even if they’re not yet earning much advertising revenue, the assumption is they will do soon. The benchmark was set in August by MySpace, when it signed a deal with Google guaranteeing $900m (£473m) of revenue. Few others will equal that, and any slowdown in marketing could hit them hard. Marketers tend to cut back on the newest media first.

It’s easy to overstate the difficulties. There is still growth, just not as fast. But the advertising pot isn’t limitless and some sites will fail, so it’s no surprise that so many owners of Web 2.0 sites are looking to cash in while they can. The big media companies thinking of buying them could find that, if advertising continues to slow down, they are left with an expensive drain on resources.

But it is good news for advertisers. There is already some anecdotal evidence that unused online media inventory is rising and advertising rates are falling. With so many sites with large audiences, brand owners can afford to be more choosy about where they spend their money and demand more in return. Dominic Dudley, Interactive editor

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