There was a time when Mark Seremet considered MySpace one of the best things to happen to his business. Seremet, then-CEO of customized clothing company Spreadshirt, saw sales jump sixfold in late 2005 and early 2006 after he ran ads on the popular social networks MySpace and Facebook. "Somebody would get the shirt, then tell a friend," Seremet says. "It was really an amazing change for the business."
But Seremet's love for social networks, including the News Corp. (NWS) flagship, soon diminished. By last year, when he left Spreadshirt for another company, ads on MySpace had lost a lot of their oomph, measured by the number of times users clicked on them. The ads' so-called click-through rate plummeted from one in 100—a decent return by Web standards—in 2006 to one in 1,000 in 2007. "Users became more or less desensitized to the advertising," says Seremet, a veteran of Take-Two Interactive (TTWO) and now president of video game publisher Green Screen. "You won't make money on it."
Seremet's experience reflects growing frustration at a lot of companies hoping for a boost from advertising on social networks like MySpace. Across the Web, companies large and small, from Spreadshirt to Google (GOOG), are throwing money at social-network advertising but not getting the hoped-for returns.
You won't hear much complaining from News Corp., though. Sales for Fox Interactive Media (FIM), the division that includes MySpace, surged 87% in the last three months of 2007 from a year earlier, "primarly due to revenue growth for search and advertising at MySpace," said News Corp. Chief Financial Officer David DeVoe on a conference call. That puts the division on track to reach CEO Rupert Murdoch's goal of $1 billion in sales by the end of 2008, said Chief Operating Officer Peter Chernin. FIM generated $23 million in operating income—up from $1 million a year earlier. "Turning to FIM, we are starting to see real progress on the advertising front," said Chernin. "We have regained our momentum at MySpace."
That's just what Murdoch wants to hear. He purchased MySpace for $580 million in 2005 as part of an effort to put News Corp. at the forefront of a boom in online social media. The strategy includes last year's acquisition of Dow Jones, parent of The Wall Street Journal. News Corp. reiterated Feb. 4 that it will keep the bulk of the Journal's Web content behind a subscription wall; that limits what the company can generate from advertisers hoping to reach a large audience, but it ensures a steady stream of subscription fees. News Corp. also has no plans to fight Microsoft (MSFT) for Internet icon Yahoo! (YHOO). "We are definitely not going to make a bid for Yahoo," Murdoch said.
As impressive as MySpace's ad-revenue growth may be, some marketers are dissatisfied with the effectiveness they're seeing from placing ads there. Of the total revenue generated by FIM, $62 million, or 26%, comes from a $900 million, multiyear deal with Google (BusinessWeek.com, 8/8/06) that gives Google the exclusive right to place search ads on MySpace pages. The idea is that Google acts as a middleman between marketers who want to reach social-network users and the networks where those ads are placed. Trouble is, Google pays News Corp. for that right even when the ads don't generate much, if any, revenue. "We have found that social-networking inventory is not monetizing as well as expected," said Google Chief Financial Officer George Reyes during a Jan. 31 call with analysts (BusinessWeek.com, 1/31/08).
Still in Its Infancy
The impact is felt especially acutely by direct marketers who want people to click on their ads and then buy something from a Web site (as opposed to, say, advertisers who simply want to get a brand message across). Direct marketers say only a fraction of 1% of the people who see the ads click on them. Chernin says new targeting efforts enabling marketers to deliver ads to more than 750 interest groups are bringing results. Some marketers, he says, have seen as much as a 300% improvement in response to their ads. But that increase is off the comparatively low response rates for social-network ads in general, marketers say. And even that improvement may not be enough for marketers disillusioned with social-network advertising. "It is really hard to make money on anemic click-through rates," says Seremet.
To be sure, most marketers consider social-network advertising to be in its infancy and expect it to take some time to be successful. Even Google founder Sergey Brin says his company still has not found the "killer best way" to advertise on social networks. "I think it's a massive opportunity," says Paul Levine, vice-president of marketing at AdBrite, an advertising network that places ads on social networks across the Web. "And, like any medium, it takes a while to figure out what will work. I think it's no question it will be big business."
There is a question, however, about how much experimentation social-network users will deal with before they ignore the ads completely—or even leave the site. According to Web measurement firm comScore (SCOR), MySpace saw its U.S. audience fall from nearly 72 million visitors in October, 2007, to just shy of 69 million in December. The number of minutes users spend on the site also has decreased, dropping about 24% in December from the prior year, to 179 minutes per visitor per month, according to comScore. "There's too much [advertising] when you sign on," says John Sigona, a 32-year-old MySpace user who likes the site, though he ignores the ads. "They don't interest me." If the comScore figures constitute a trend, MySpace may need to rethink its social–media strategy.