Social Network Sites: Popular But Not Profitable

Despite generating a hefty media buzz, social networking sites like MySpace.com and YouTube Inc. have not yet figured out how to use that publicity to generate significant advertising revenue, according to a report released last week by IDC.

The Framingham, Mass.-based research firm predicts that while the barriers keeping companies from advertising brands on sites featuring unfiltered user-generated content may eventually be solved by some social networks, others may never be able to attract significant advertising, the report noted.

The issue of advertising on social networking came to the forefront last week when YouTube launched new overlay advertisements, prompting numerous complaints from its users, some who threatened to stop using the site.

"YouTube is a prominent example of the problems that surround advertising on social networks. Its members abuse the freedom to upload any video [and to] publish content that they essentially stole and to which neither they nor [YouTube owner] Google hold the copyright," the report noted.

The report also noted that "big brand advertisers such as General Motors, Colgate Palmolive or Kraft will likely not run ads on YouTube as long as it features illicit content."

YouTube, the report suggests, could earn substantial advertising revenue if it could figure out a way to acquire premium content from distribution deals with companies like Viacom Inc., NBC and Walt Disney Co. However, the report noted that Google so far declines to pay the sums required to purchase the content.

The report did note that MySpace generated US$125 million in advertising revenue in the fourth quarter of 2006, but also added that the total amounts to only a fifth of what Microsoft Corp.'s Microsoft Online Services Business brought in during the same period.

MySpace's primary challenge is to offer advertisers precise demographic targeting and to provide an environment that doesn't threaten the safety of a company's brand, according to the report. "If it chooses not to restrict or filter user-generated content, it may never support brand advertising on a larger scale," the report added.