Can you make money out of social networks?

The battle between social networks has been bubbling over, and last week the two biggest players, MySpace and Facebook, fired their latest salvos in a bid to woo advertisers and create business models that will generate revenue and prove their market valuations, which have been lambasted by some as extravagant.

The strategies aim to offer advertisers better mechanisms through which to reach consumers and come as the industry digests Google’s OpenSocial announcement – its answer to the inexorable rise of Facebook – an open network strategy with over 30 partners, including MySpace.

Essentially, the advertising platforms offered by MySpace and Facebook both feature a form of targeting, but the latter has a three-pronged strategy: brand pages, social ads and Beacon. Facebook Ads, as it is labelled, allows brands a varying level of “submersion” within its network.

Advertisers and brand owners can create brand pages, encouraging users to sign up as “fans” of the brands. Users can then take an action, such as reviewing the brand, and the advertiser pays them to broadcast a message to their friends. Finally, Beacon is a platform that allows Facebook to track users’ purchases on sites outside its social network and then serve them related ads when they return.

Brand pages are nothing new. The likes of Bebo, MySpace and Piczo have all featured branded profile pages. Facebook also had them but its new offering is different because of its referral, or social aspect. Some claim that its impact will be as big as Google AdWords, which revolutionised search.

Indeed, Facebook founder Mark Zuckerberg said at its launch: “The next 100 years are going to be different for advertisers, starting from today.” A bullish Zuckerberg added: “For the past 100 years, media has been pushed to people, but now marketers are going to be a part of the conversation.”

Yet Facebook’s strategy is under scrutiny as observers question whether its platform invades user privacy. Meanwhile Nick Reid, UK sales manager at MySpace – which denies any attempt at “a spoiler” by making its “hyper targeting” announcement just before Facebook – says: “Unlike some other networks, our targeting is not a third eye. It uses the data users already give to us. We serve our users relevant advertising, but not in a ‘big brother’ kind of way.”He concedes, however, that “information can be beneficial or Machiavellian – it just depends on how you use it”.

Behavioural targeting is nothing new either, although much has been made of its developments over the past year. Google, Microsoft and Yahoo! have all made moves into it via acquisitions and new platforms, while ITV recently announced it was to use it. However, Travis Katz, head of international operations at MySpace, is at pains to point out that its technology uses data that users have given freely to the network, as opposed to tracking behaviour outside it.

Bob Ivins is executive vice president of international markets at comScore, which analyses Web traffic and user behaviour. He is enthusiastic about the platforms on offer from the two big players: “The move into behavioural targeting was inevitable – that’s where the Web is going. Advertising is about reach; the internet is about relevance and context and trying to create an appropriate space. On Facebook, if I’ve told them I’m a real fan of Bruce Springsteen and they serve me an ad for his album or concert tickets, that’s great.”

He concedes that there could be a short-term backlash to behavioural targeting on Facebook, but says that direct marketers have been using personal data to target consumers for years. “Because technology is involved, there is a bit of a frenzy around its application,” adds Ivans.

Nick Burcher, digital buying director at ZenithOptimedia division Zed, says behavioural targeting is either the most highly targeted or most invasive advertising proposition there is, depending on who you talk to. “The debate around advertising in social networks is similar to that of mobile. It’s extremely personal, so there is a question as to whether brands should just muscle in on the space,” says Burcher.

Yet Joerg Reimann, head of marketing innovation at BMW Group, is positive: “It will become a very successful advertising medium. Having advertising didn’t damage blogging and it probably won’t damage Facebook. [Even] if one faction gets upset, Facebook is so big already, the masses will get used to it, while those who think it is too intrusive will simply move on.”

Chris Seth, managing director of teen social network Piczo, which uses targeting, talks about the “power of data”. “It’s exciting for the industry, but the devil is in the detail,” says Seth who adds that everyone has their own way of targeting. “Piczo is a platform for our young users to express themselves. Ours is a core focus on expression as opposed to connection, and brands are relevant to that expression of who our users are. As a network, you must remember what has made you what you are and you need to be 100% certain that your ad proposition enhances your offering.”

One observer says advertising on the likes of Piczo or Bebo, where users are younger, is perhaps more easily accepted by its audience demographic: “Facebook runs the risk of alienating users who are part of the ‘no logo’ generation. Younger users are perhaps less brand cynical, while Facebook users might be turned off by the network making huge revenues from their data © and getting in the way of their experience.”

Yet, for advertisers there can be little doubt that they need to be in the networking arena. The UK has the most social networkers in Europe, with almost a fifth of all internet users regularly visiting sites like Bebo, Hi5, Facebook and MySpace (Jupiter Research).

As Reimann says: “It is where the big money is moving to.” Data from Hitwise shows that traffic from search portals to networks has more than doubled in a year, while traffic from such sites to shopping or classifieds has risen dramatically since August to over 7% of traffic and rising.

He adds that it will change social platforms, by altering the tone and could lead to other platforms being established with neutrality as their unique selling point. He adds: “Advertising won’t damage Facebook, but it will change it. It is an advantage because advertising is becoming more intelligent and the customer gets to see the advertising they really want.”

MySpace’s Katz says that from conception MySpace was built to carry advertising, unlike rival Facebook. He says 80% of Fortune 500 companies advertise on the platform and users have become part of the campaign, acting as ambassadors for advertisers.

As VCCP Search managing director Paul Mead says: “Making money is something no social network has been able to crack so far, but this is the best effort so far to monetise it. The key thing for brands to think about is value. Google AdWords revolutionised online advertising after its launch in 2000. It is the sole reason that Google and search marketing is as big as it is now. The old auction-based system was a bad user experience, but AdWords combines the auction with relevance. It was the killer application for Google.”

Mead believes that the priority for brands on social network sites lies in developing widgets that can sit on webpages and make it easier for users to do things such as book restaurants or theatre tickets. He says there is a need for alternatives to banner ads, which are losing effectiveness. He quotes research from Eye Blaster that says click-through rates on banners on the biggest portals are just 0.2%. “People are seeing these ads, but aren’t really doing anything. Brands are asking why aren’t people engaging with my brand ads?”

Katz claims that targeting on networks will help boost click-through rates: “The hyper targeting model was tested for three months with brands such as Coca-Cola and Procter & Gamble; they saw a 50% to 300% hike in click-through rates on banner ads, as they were relevant.” However, he says embedded widgets on MySpace, for sites such as Photobucket and Flickr, helped build these sites’ user bases and agrees they are “excellent” tools for advertisers.

He says such open access and symbiotic relationships between sites creates a better user experience and is the motivation of MySpace’s collaboration with Google as part of the OpenSocial network. “It’s part of the openness of the Net and has been part of our philosophy from the start.” In a thinly veiled swipe at Facebook, he says: “We’re not arrogant enough to think we can lock in innovation behind walled gardens.”

Katz says joining OpenSocial is not a counter measure to the rise of Facebook, but, instead, the result of a shared philosophy: “By allowing developers to create APIs (application programming interfaces) that can be used across many platforms, it means a better user experience, while advertisers can gain greater reach. It’s not about revenue, it’s about user experience.”

He says this is as true for advertisers as it is “MySpacers”, as they can use the same technology across many platforms, while having to create bespoke applications for Facebook and argues that this relationship and its hyper targeting offer helps advertisers tap into the long tail in the way that AdWords did.

Zed’s Burcher agrees Google’s OpenSocial could prove to be the winner. “It’s very clever,” he says. “Its corporate mission is to organise the world’s information, which it can’t do behind walls. If Google has the data and incorporates this with AdWords platform, it could democratise the networks. It could also give users huge benefits, as they wouldn’t have to input their data into each network every time they registered, while advertisers could run content across the platforms.”

MySpace clearly sees the value of forming such a relationship, with co-founder and chief executive Chris De Wolfe further urging Facebook to break out of its “walled garden” and join the alliance at last week’s Monaco Media Forum – where, incidentally, Publicis chairman Maurice Levy warned we could be heading for a Web 2.0 bust: “It’s exactly the same situation as we saw at the end of the 1990s, when everyone thought that because he had a website he’d get the valuation. Now everyone building a Web 2.0 operation believes he will receive the advertising. I’m not sure we’ve found the right way of communicating with that audience.”

Bebo, also part of OpenSocial, has gone one step further by repositioning itself with the Open Media platform that allows broadcasters to distribute their content via its network and allows advertisers to embed advertising.

But Facebook looks to stand alone, for the moment at least. It has fewer user numbers than MySpace, but advertisers are keen to get on board: over 100,000 brand pages were created in the first 24 hours.

Yet, according to Sky director of online and partnership marketing Scott Gallacher: “Too many brands don’t think through their Web 2.0 strategy. They think they have to be on MySpace or Facebook, but it’s not about the platform, it’s about developing a genuine strategy, while being relevant, not intrusive.”

Social networking may be an easy way for people to meet and stay in touch, but it is an increasingly complicated arena for advertisers. It seems clear, however, that if they adhere to the spirit of the Net – openness and a free exchange of data – advertisers can be part of the dialogue.

But it has to be an open one, in which case the face-off between MySpace and Facebook is just a distraction and all eyes should be on Google once again.