Social networking sites find it tough to make money

Soaring user numbers aren’t quite translating into moolah for social networking and social media sites.

The likes of Orkut, Myspace and Facebook are fast realising that the traditional pay-per-click advertising model is just not working for them.

Such networks, based on content created by members, account for the largest chunk of web traffic today. Yet, almost all of them are struggling to monetise these numbers.
Hari Krishnan, who heads the Indian unit of the world’s largest social networking site, the Rupert Murdoch-owned Myspace.com, acknowledges that unlike users of search engines, their members may not be in a mood to click on advertising links.

“The concept that you keep opening new pages to get information is from the age of the portal. Besides, our pages are designed in such a way that the user has all the information on a single page,” Krishnan said at the ‘Social Media Summit’ in Mumbai on Friday. “So, the click-through rate for ads is very low on social networks.”

Most of the big internet players are present in the ‘social networking’ category, built around the concept of users keeping themselves entertained by sharing thoughts, videos and pictures, etc. While Google has Orkut, News Corp has Myspace and Microsoft bought a stake in Facebook a year and a half ago.

The popularity of such sites has rocketed over the years. According to web analytics firm compete.com, Myspace accounted for 2.35% of the total time spent online by all US residents in February 2009, compared with 0.34% for CNN.com and 0.09% for NYTimes.com.

Globally, around a third of all web traffic is estimated to be generated by such websites. Orkut, for example, has around 14 million registrations from India, where only 35 million people access internet at least once a month.

The category accounts for five out of the top ten most visited sites.

However, thanks to very low click rates, industry participants suspect the category accounted for just 5% or less of the total online ad spend in the country in the last 12 months.

“The return on investment (RoI) from social media don’t match the media planners’ idea of RoI,” says Beerud Sheth, co-founder of mobile and online solutions provider Webaroo Technology India. “You cannot ask me ‘CPL (cost per lead) kya milega’?” he says, referring to the price quoted by search-engine-marketing firms for each lead they generate.

Instead, he is hawking ‘engagement’ with consumers through discussion fora, groups and even the plain old banner ads around brands and products.

“If a consumer endorses your product on a social network, it will have much more impact than any form of advertisement,” says Sheth.

However, most brand managers are looking for measurable results such as clicks and leads.

Prasad Narasimhan, marketing head, Virgin Mobile, says, “We can talk about engagement and all that.

But if I have to put in Rs 2 crore of my brand’s money, you need to find some mathematics to measure the impact.”

Some stakeholders believe the impasse will be ultimately resolved by going back to the conventional idea of charging for the ad, whether or not someone has clicked on it.
“The problem is that we are applying the metric of search advertising to social media,” says Mahesh Murthy, founder of the digital marketing agency Pinstorm. “How are you measuring the RoI when you advertise on TV? You are paying because people are spending time in front of your brand. They have to come back to the idea for social networks as well,” he adds.

Management guru Thomas Davenport had told DNA earlier that it was doubtful these sites would ever make money.

“Some of these things kind of rise and fall with fashion. Clearly, they have tapped into something, but I am slightly sceptical about them in a business context,” said Davenport, who holds the President’s Chair in Information Technology and Management at Babson College, located in Wellesley, Massachusetts.