Despite early promise, the huge question mark facing social networks has been their ability to properly monetise both the huge amount of information they have on their members and their large reach. Although advertising spend continues to grow, it still only represents a small percentage of the overall Internet advertising budget. Tim Hoang reports on how social networks are looking to deliver for investors.

Advertising on Social Networks

Social networking sites continue to prove popular with the UK population with a growing number of users spending more time on the sites. It was estimated that 11 million people in the UK (about 30 per cent of UK Internet users) accessed social networks last year. The growing number of users and the ability to easily spread marketing messages is reflected in the expected rise in advertising spend. eMarketer predicts that 2008 will see a £115 million spent on advertising on social networking sites - an increase of 77 per cent. This growth in spending is expected to continue with a further 148 per cent increase by 2012, as a £285 million spend is projected.

However, these figures still only represent a tiny portion of the UK online ad spending. The £115 million figure expected in 2008 is only 3 to 4 per cent of the total spend on online advertising. Recent deals have seen large funds exchange hands in the social networking space. Microsoft paid $240 million for less than two per cent of Facebook valuing the four-year old company at $15 billion. More recently, Time Warner-owned company, AOL purchased Bebo for $850 million.

"Though social network advertising is forecast to grow aggressively this year, it will only do so if social network operators can develop substantial metrics showing the value and performance of the advertising," said Debra Aho Williamson, senior analyst, eMarketer and author of the report, UK Social Network Marketing: Ad Spending and Usage.

Free is the Magic Number

Andy McLoughlin, co-founder and product strategy director, Huddle.net - a company which pitches itself as a social network for businesses, expects social networks to continue struggling with unreliable revenue streams.

"Profiting from social media has always been difficult. Web 2.0 has become synonymous with free - users expect or even demand gratis access to content and services.  Sites that have traditionally charged for access have either changed their model to free - such as Where Are You Know - or, like FriendsReunited, died a slow death," he said.

"Web users, especially early adopters, are horribly fickle and won't think twice about moving to a free alternative. Increasingly low barriers to entry mean that there are likely to be handful of near-identical competitors.

"In my opinion, the two main ways that a site can hold onto users is either via strong community providing masses of user generated content - i.e. YouTube - or providing tools and services that are simply better than the competition. For the former, ad revenue remains the best plan although Last.fm has successfully implemented a premium plan giving extra features and special access to cool new stuff. For the latter, subscription services provide monthly revenues, possibly on top of any ad revenues, which is a classic way of monetising a free version," continued McLoughlin.

Community Fares

Above: iStockphoto, a social network that is turning a profit

One company that is profiting from the success of its community is iStockphoto. Although not perceived as a typical social media site, the micro-stock photography relies on its community of photographers and users of photography. An average of one image is downloaded every 1.4 seconds and iStockphoto has turned the community into a real dynamic marketplace.

Bruce Livingstone, CEO and co-founder, iStockphoto reveals that the key to iStockphoto becoming a profitable company is because its primary function was as a community which continues to be the case.

"Part of the reason that the iStock community thrives so thoroughly is that we were a community first, before we were a business. And although we are now a $70 million enterprise, localised in 12 languages the community remains prevalent in all of our decision-making," said Livingstone.

"We are different from other social networks and the copycat microstocks that came after us because our approach to the community remains humble, compassionate and educational. We share things with them, we welcome suggestion, criticism and complaints, and we fully appreciate that the community will drive us forward. Some of our best features such as video clips and audio tracks are created because our community requests them."

"Another reason we are so successful is that we share revenues with contributors. In 2007, we paid out more than $20.9 million in royalties to member artists, some of whom make a full-time living from iStock," he continued.

More than Ads

Social networks can also add another dimension to the business communications rather than merely providing a revenue opportunity. Social networks are known for helping foster business communications both internally and externally - building relationships with a range of key audiences. One such example is thehospitalclub.com, the social network of the member's club, The Hospital which focuses on creating a platform for those working in creative industries to communicate.

The social network is a specialised, niche social network set up solely for people working in the creative and media industries. The site features a whole host of services such as job directories, work show-casing and profiling, collaboration and mentoring applications. Membership to the social network is free, but only open to those who work in the creative industries, including media.

This also means that the social networking environment consists of a very specific audience demographic, enabling advertising to be very targeted to a certain kind of early adopter and influencer demographic.

The popular belief is that social networks will continue to struggle turning over the profit expected of them. While it will be difficult to fulfil the huge expectations (and investments) associated with the reach and membership of such sites, there are businesses models around which can profit from communities.