Digital Media Buzz > Leveraging the Lemming Effect: How Social Media Makes Money

Leveraging the Lemming Effect: How Social Media Makes Money

By Margaret K. Collins

Social media is too powerful not to make money.

“The power of social media is that there is so much micro-segmentation going on,” says Kevin Flaherty, co-founder and vice president of the social-networking provider Wetpaint.com.

Many industry analysts, social networking providers and marketing firms agree. The question is: Which companies will use networking sites to turn a profit in addition to building community around a brand, and which new advertising models will emerge to capitalize on them most effectively?

Why Money Matters
While much attention has been given to Twitter, which isn’t running ads, some social media sites are generating revenue. LinkedIn, for example, runs traditional display ads on its professional networking site.

Industry-wide advertising dollars devoted to social networking sites will total an estimated $1.1 billion this year, according to a report by the digital market research firm eMarketer.com. That figure is a 3-percent decline from 2008 — due to the economy — says eMarketer spokesman Samson Adepoju, but spending is expected to rebound in 2010 to $1.3 billion.

MySpace, which News Corp owns, accounts for half of U.S. social networking advertising space, amounting to an estimated $495 million, according to the report. Facebook, a private company, will increase its share by an estimated 9 percent in 2009, to $230 million, the report says.

Meanwhile, mobile is mounting. Reports in the New York Times, Reuters and BBC project social networking advertising on mobile devices and use of such sites on mobile devices will continue to grow.

But is social media worth the investment?

Social media providers, such as Google and Wetpaint, have felt the pressure to prove a correlation between engagement and financial results or “run the risk of having your dollars taken away and put somewhere else,” especially in these economic times, says Wetpaint’s Flaherty.

Google announced on July 16 in its earnings call that new advertising models and formats in video, such as overlays and in-streams, would eventually make YouTube — the video sharing site Google bought for $1.65 billion in 2006 — turn a profit.

Wetpaint teamed up with the digital consulting firm Altimeter Group to research how social media can enhance a company’s bottom line. The resulting report, released in July, states that engagement on social media can be measured, that there is a strong correlation between engagement and financial performance and that companies using social media have more “pricing power” to control how much they charge their consumers.

But ultimately, to make the most revenue from social media sites, advertising models will have change for them — not the other way around, says Jonathan Yarmis, principal analyst for the Connecticut-based Yarmis Group, which covers the social media space. “If you’re not thinking about how I could bring my social graph into a commerce environment, you’re not thinking about the future of advertising,” Yarmis says. “I want my commerce experience to be influenced by my social connections.”

That’s where Facebook comes into focus.

Behavior is “the buzz”
Facebook offers advertisers a place to reach their “exact audience,” the site states.

When someone searches on Google, for example, the advertiser doesn’t have much information about the individual, says Patrick Schwerdtfeger, author of Webify Your Business, Internet Marketing Secrets for the Self-Employed. Are they young, old, male, female?

But Facebook users are increasingly adding information to their profile including their gender, age, location, education, languages, marital status, workplace and interests. And they are connected to other users – their friends – often with similar interests and demographics. “Behavioral targeting. That’s the buzz today,” Schwerdtfeger says.

Technology is being built to leverage keywords used in user profiles on sites such as Facebook to direct ads to specific users – and their friends. Privacy concerns are a hurdle for mass implementation but many industry analysts see such customized ad placements as the future.

“Corporate messaging is dying,” says Schwerdtfeger. “It’s all going to personal messaging.”

Twitter: Searching for its money strategy
Twitter’s platform presents different opportunities and challenges. Twitter users are increasingly using hashtags (#keyword) to make searching for popular topics easier. Going to “search.twitter.com” allows for searching millions of tweets by keyword and there are other Twitter applications that will alert a user any time a keyword or phrase is tweeted.

“The ability to search real-time conversations for specific terms presents an enormous opportunity for marketers,” Schwerdtfeger says. “Any future revenue model will likely revolve around that functionality.”

Imagine a florist receiving an alert when a tweet includes the word “wedding” and being able to engage that user immediately, he says.

How Twitter will monetize it’s capability, however, is still unclear. “We spend more money than we make,” the site states. But Twitter says the company has “many appealing opportunities for generating revenue” but is “holding off implementation” while it develops.

Does it matter if Twitter is profitable?

Only if the company wants to remain independent, experts say. If Twitter’s founders want to be bought by a larger entity – like News Corp bought MySpace or Google bought YouTube — generating a profit doesn’t matter as much as improving its functionality and solving problems, such as spam.

It all comes back to communication.

Not everyone thinks new revenue models and advertising formats are the key to social media’s financial sustainability. “Twitter and Facebook are just marketing channels,” says Teri Ross, president of the marketing firm, Imagine That. “They are just communication tools.”

Revenue will be advertising based on social media sites, as in the past with television, print or radio. The industry will find ways to tie adds to tweets, online videos or personal posts.  The most successful sites — and advertisers on them — will understand their audience, have a consistent message and offer a compelling product with value.

“All of the conventional marketing strategies are in play,” she says.