Page last updated at 10:28 GMT, Friday, 27 February 2009

Making money on a social network

By Dave Lee
Technology reporter, BBC News

Facebook screen grab
Facebook now has more than 175 million registered users
It remains the elephant in the room. Or, more to the point, the "fail whale" in the room.

Just how are social networks, with their millions upon millions of users, going to make money?

The profits should be rolling in: Twitter, which has been catapulted into the public-eye thanks to Stephen Fry and Barack Obama, is currently surviving on multi-million dollar handouts. And Facebook, the global force in social networking, has yet to harness its huge user base to bring in any significant revenue.

Many believe answer may lie in advertising.

Unlike traditional mediums, which were built on the mantra of getting as many eyes on a product as possible, social networking instead allows for targeted ads aimed at ages, interests, hobbies and so on.

Techlightenment, a company specialising in social media advertising, ran the online campaign for the film Tropic Thunder. The firm's head of media, Richard Ireland, says social media allowed them to not only publicise the film, but also advertise directly at certain types of people.

"We could easily display our ad for people who say they are fans of Ben Stiller," he says. "Or Dodgeball, Jack Black etc. It's really about making it relevant."

He says when adverts are targeted to particular people, the number of users that click the advert goes through the roof.

Other industries, says Mr Ireland, can use more subtle approaches to find the right audience.

"Nobody puts on their profile that they love credit cards, but what they do put on their profile is 'I love shopping'. That demonstrates the power of the information networks have at their disposal."

Stephen Fry on the joys - and dangers - of Twitter

He says advertising agencies, and perhaps even the social networks themselves, have yet to adapt to this new form of reaching a specific audience.

But where do you draw the line on what personal information advertisers have access to? The safety and privacy of user data is a controversial issue. Just ask Facebook: Last week it tweaked its terms of service, causing a huge backlash from members. Days later, it bowed to pressure and changed them back again and have now handed over the way it handles personal data over to its users.

It is difficult to imagine how Facebook could implement a change that drives revenues while retaining users. MySpace and Bebo, on the other hand, have adopted a much more aggressive advertising strategy.

Alex Burmaster, communications director at Nielsen Online, says MySpace resembles a more traditional form of advertising, with the homepage often transformed for various promotions much like a classic billboard ad. He also argues that MySpace users are more accustomed, and more accepting, of adverts.

"Their site is a lot about music and entertainment. So if they see music and entertainment advertised on there it's part of the experience. For Facebook, it's a Catch 22: The more targeted the ad technology, the more attractive it is to advertisers, but it's more freaky for the users.

"When Facebook get the technology right, it will make a massive difference. The potential is absolutely enormous."

Relative newcomer Twitter potentially faces a trickier battle. Like Facebook, it attracts an older user base, but it doesn't have as much personal and, crucially, sellable data.

Facebook boss Mark Zuckerberg, BBC
Mark Zuckerberg started Facebook to help students connect

Twitter co-founder Biz Stone recently blogged that it is looking into building "revenue-generating products". Whether that is ad-funded or subscription based - like the very successful photo-sharing site Flickr - remains to be seen.

Popularity is no guarantee of success, of course. Friends Reunited, pioneers of social networking in the UK, is rumoured to be going up for sale for 20 million. A fraction of the 175 million ITV paid for it three years ago.

Like all businesses, social networks will soon have to confront the balance sheets. However, if they can weather the economic storm, the future could be extremely prosperous. The real social networking boom may still happen.

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