There's been a lot of speculation about the profitability and business model of social networks since the extraordinary valuation of Facebook, when Microsoft bought a small stake in the company back in 2007. With billions in valuation but the business barely making enough to break-even, many questions have been raised about whether social networks can make real money. But then there's MySpace. MySpace is still holding onto the number 1 spot in the US but it's total global audience is now about half that of rival Facebook. However MySpace is at the $1 Billion revenue mark and growing strong. This article by Matthew Garrahan of the Financial Times looks at the success of MySpace's hybrid advertising model. Perhaps this is the right template for other social networks to follow?
On the money in social networking
By Matthew Garrahan in Los Angeles, Financial Times/FT.com, January 28 2009
Chris DeWolfe is dashing around his Beverly Hills office. The co-founder of MySpace is preparing to go to Davos, where he will rub shoulders with leaders of the world economy, including his boss, Rupert Murdoch.
Davos this year is packed with gloomy-sounding sessions on the collapse of global capitalism but Mr DeWolfe is in an upbeat mood. MySpace has fine-tuned its advertising model and as it celebrates its fifth birthday he believes the site can prove its critics wrong about the durability and profit-making potential of social networking.
With their millions of users, social media has long been seen as a panacea of online advertising. But sites such as Facebook and MySpace, which is part of News Corp, have been unable to turn those users into significant profits. MySpace narrowly missed a $1bn revenue target last year, while Facebook has preferred to concentrate on building a large base of users.
By Mr DeWolfe says a relentless focus on profits at MySpace is starting to pay off. "From day one we have always been focused on building a really big, scaleable business that is based on advertising," he says. "If you are a big brand and you want to reach any demographic you can get real scale on MySpace."
The group has devised a hybrid business model that combines big branding campaigns on the popular pages with its ability to "hyper-target" millions of users according to their interests.
The big, more general advert campaigns are a recent factor: MySpace has introduced branding on its home page, which is seen by more than 50m users daily. "That's more people than watch American Idol ," says Mr DeWolfe. Such campaigns used to be found only on portal sites, such as Yahoo, AOL and MSN but Mr DeWolfe says MySpace has those companies in its sights.
This is partly because MySpace has built a sufficient user base to compete for what is a much larger pot of money. "In the early days, either the brands or their media buyers would reserve a small part of their buy for social media sites - the rest would go to the portal sites," he explains. "But what has happened is that we are now competing against offline media and the big portals, such as Yahoo and AOL."
Analysts say this move to a hybrid model that combines the penetration of social media with the broad reach of a portal site could be decisive. "MySpace is going to be more attractive to advertisers because they have created these 'safe havens' where advertisers can put their brands," says Richard Greenfield, an analyst with Pali Research.
The home page branding comes a year after the site launched its "hyper targeting model". Mr DeWolfe says the move does not represent a strategic U-turn and instead gives the site the best of both worlds.
He points to the more than 1,000 "enthusiast groups" on MySpace as being appealing for advertisers keen to target their products at niche demographics. "We have also built a product that reaches small and medium-sized businesses that represent billions of dollars in potential ad revenue."
One user - a roofer in Chicago - turned a MySpace advert offer costing a few hundred dollars into a $30,000 roofing deal. "There has been no easy way for people like that to advertise online other than buying big display ads or by buying text ads on Google. But more than 15,000 have used our product to create graphical advertising."
With the economy crashing and advertisers reining in their spending, maintaining momentum is going to be difficult, although he says first-half sales rose 16 per cent on last year. "Where the next six months are going is hard to say because the economy is changing so quickly. But I think we are in a much better position than most of the other [online] companies formed in the past five years."