Monetizing social networks: The good, bad and ugly

[Editor’s Note: It’s well documented that social networking sites don’t pull in as much money from advertising as they potentially could. It’s a climate that promotes experimentation, right now breeding more failure than success. Among those seeing positive initial results are entertainment networking sites like Amuso. Below, the company’s co-founder Barak Rabinowitz looks at why monetization has been so difficult for these platforms, and what sites like his are doing to sidestep the typical challenges.]

There’s an elephant in the room of online advertising. An elephant in the shape of 400 million social networkers creating and consuming content, clustering around shared interests and activities — all who have yet to be tapped in any major way by web marketers.

Determining how to best reach these people is an ongoing struggle, one complicated by the soaring rate of user-generated content. For the first time, advertisers accustomed to the leading edge are now running to catch up. The conversation is no longer about display ads vs. text ads. Rather, the burning question has become: Who is going to profit from the opportunity presented by social networks, and how are they going to do it? Below, I’ve broken down good, bad and ugly efforts to capitalize on these platforms and rake in the bucks.

The ugly

Industry leaders agree that many social networks have built winning combinations of community and e-commerce capabilities. But most advertising concepts stall, or somehow fail to sell to consumers while letting them pursue their own interests and creations at the same time.

An article by Kevin Kelleher in Wired magazine earlier this year observed the paradox of expanding network memberships and weak monetization. At that time, display ads were bringing in just 13 cents per thousand views on MySpace and Facebook. The broader the audience, the more difficult it is to target ads (and in turn charge more). On the other end of this spectrum, smaller or focused sites like LinkedIn can charge more per thousand views because the audience is more specific. Applications on these sites are having an even tougher time. On one blog, app developers reported ad CPMs (cost per thousand views) far below a dollar.

It’s clear that a new, more effective model has yet to emerge.

The bad

Most social networking sites and Web 2.0 platforms rely solely on revenue generated from banner and text ads. Yet, even when marketers try to shake things up, users don’t take kindly to major changes.

Social video-sharing sites are a prime example of this. Most web surfers prefer YouTube because it doesn’t require them to watch ads or sponsorship messages before or during the videos they want to view. Sites that integrated these features after existing ad free for a while have experienced a negative backlash. But this is only part of the reason video sites have missed opportunities to make money from user-generated content. The other part is that sites with the most popular appeal (those that allow their users more free reign) are generally more vulnerable to copyright infringement lawsuits.

The bad news for all social networking sites — video portals especially — is that users generally don’t have the mentality to view and click on ads when they are on these platforms. This is why search continues to be the most lucrative advertising strategy. Users are specifically seeking information in that arena. On social networks, people are primarily concerned with communicating with their friends, not looking to buy items or services.

The good

This is not to say that all advertising strategies on social networks are doomed to failure. Not by a long shot. These sites still manage to gather consumers into engaged and accessible groups. Many sites coming out of the woodwork — even if they haven’t monetized to a full extent either — have pioneered bold new concepts that prove the principle of “if you build it they will come.” These are the ones laying the foundation for the next generation of social networking innovators to answer the question of monetization.

International social network site Badoo, for instance, allows its users to pay a minimal fee to increase the prominence of their profiles. Right now, 20 percent of the site’s 12 million members take advantage of this service, which costs around $1. The site hypothesized that people would pay to be popular, and it appears to have been right.

OurStage, a site that hosts competitions for aspiring musicians, filmmakers and comedians, has seen tremendous revenue growth by selling ads targeted to viewers who vote for their favorite artists. To keep both artists and other users engaged, the site pays out a $10,000 monthly cash prize to winners.

Last but not least, Amuso, the site I co-founded, charges users a small amount to enter contests and game shows created by them and their peers. Players who buy in can upload photos, videos, text and audio files in order to win prizes. The platform allows amateur models, pop stars and comedians looking for industry exposure to turn a profit themselves by creating and promoting shows. And of course the site gets a cut too.

There are a thousand other strategies like these yet to be pursued or even thought of. And in this light, even failed attempts can be considered promising. As more developers and entrepreneurs fumble toward creative and unobtrusive ways to profit from the networking masses, successful tactics are sure to emerge and push Web 2.0 toward its next incarnation.

Barak Rabinowitz is co-founder and chief operating officer of Amuso, a site that allows users to create and participate in entertainment contests and game shows. Previously, he advised on mergers and acquisitions for Morgan Stanley and helped Yahoo and Sony implement new business strategies.