Friday, February 29, 2008

Social Networking and On-Line Advertising

On-line Advertising is a big business. Actually, it is a HUGE business. And the big and small Social Networks are trying to take their cut of the pie.

There are many estimates of On-Line advertising:
- Rayport estimates the US market to be $28 Billion, with the Big Three (Google, Yahoo and Microsoft) commanding 85% of that market. (Business Week)
- Jerry Yang estimated the worldwide on-line advertising market to be $45 Billion this year and growing teo $75 Billion by 2011 in his recent letter to Yahoo! stockholders.
- Google had revenue of nearly $5 Billion last Quarter – so a $20 Billion run rate by themselves that is mostly advertising based. Yahoo is at a nearly $7 Billion run rate.
- "Google, Yahoo, Microsoft, and AOL each regularly see a minimum of 100 (sic) million unique visitors each month, according to research firm comScore (SCOR). Advertisers that want to reach a big audience are still likely to gravitate toward an established portal.” (Business Week)

Advertisers are spending a larger portion of their budgets online versus traditional Print, TV and Radio. I was discussing with one large advertiser (over $200M annual advertising budget) that they were shifting their online ad budget from 10% to 35% of their overall budget.

The large social networks (MySpace, Facebook, Hi5, Bebo, etc.) have between 10 Million and 80 Million members each. And the time spent on these social networking sites is above the traditional portals. It is no wonder that advertisers are shifting an increasing portion of their budgets to social networks. It is certainly the core reason why Microsoft valued Facebook at $15 Billion with their recent investment. With the amount of clicks on their site, and the ability to do valuable target advertising, it is easy to see how Facebook revenue will continue increasing rapidly. If Facebook could grow to claim 10% of the online advertising market by 2011, it could be worth $7.5 Billion in very high margin revenue. Which means that News Corp. got a “steal” with MySpace at a valuation of $600M, and Microsoft might actually see a decent return on their $240 M investment in Facebook.

There is also the rise of mini-social networks. These are targeted communities that are bound by some sort of common interest, passion or need. Glam is an example of this, with estimates that they will grow to $100M in advertising revenue this year from a number of targeted web sites. Ning provides a platform for over 160,000 of these types of communities. They provide a simple mechanism for the community web site to be hosted for free, with Ning producing revenue from the ads. Alternatively Ning provides a mechanism for the community to make money directly from selling their own ads. The 2 Million users that visited Ning last month are many, many mini-social networks all bound by a common hosting environment.

Social Networking is a new market that is being crowded by start-ups and venture capitalists hungry to chase after this advertising gold rush. Certainly there will be a lot of shake out. And it is uncertain as to the long term sticking power of any one brand. As we have seen over the past 13 years of the Internet since Netscape was first created, the web allows for users to change quickly with even dominant brands like AOL and Yahoo! coming under pressure from new forces over time. However, it is clear that Social Networking as a fundamental part of the Web will continue to grow and thrive.


edwink said...

I really enjoy reading your blog. The idea behind your new venture sounds very interesting. Are you going at some point explain how what you are aiming for is different from Ning?
Thank you,

Bob Bickel said...

When we announce it will be much clearer, but we are not quite ready for that. What I will say is that Ning is a great product - I have played with it and built a community in less than 30 minutes. It has a ton of nice community building features and the fact that so many people have built community sites with it is pretty impressive. I also like Leverage Software, which might have even better community building features, but it costs real money to even try it the last time I used it. I have not played with other ones, but I hear decent things about OneSite and KickApps as well when I talk with folks in this space or users.

Bob Bickel