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October 30, 2006

IT#5: The Value of Social-Networking Sites -gfodell

I was searching Youtube.com for some videos a friend put up of himself and I noticed a few advertisements on the side and corner of the website. I thought to myself, "yeah, I know who Cingular is already, I'm not going to buy the product just because the logo is on a few websites that I visit." I had been doing some research and following the topic for a while, and recalled an article about how Google bought Youtube.com for $1.65 billion dollars. That seemed like an astronomical amount of money for a website with totally free usage, and I didn't see any reason for advertisers to pay the website to have logos and things nobody looks at. Well, apparently I found some people that agree with me. In the article Turning Social Network Traffic into Dollars, Stefanie Olsen cites many reasons why many social networking sites attract millions of users, yet can't find advertisers willing to spend money on them. Reasons she cites are:

• Advertisers don't usually want to associate their brands with sometimes-inappropriate user material.


• Only a very small fraction of the members of sites like myspace.com participate in the "affinity groups" set up to specify target markets


• Some people, like those at the Economist in the article Hanging with the in-crowd. believe that the social networking scene is so competitive, advertisers may be scared that most sites will fail in the long run.

To combat these fears sites like Myspace are taking creative approaches to advertising on their website. For example, companies that want to advertise a new movie can create sites for new movies that other members can visit, or create certain characters from movies that users can interact with, such as Wolverine from the new X-Men movie or game.
Myspace users will then be able to interact with these movie sites/characters, and developers are working on automated instant message systems, so that users can have "conversations" with these characters. I'm guessing this is targeted at a very young demographic, as I couldn’t imagine older users wanting to talk to a program pretending to be Wolverine. However, even with this slightly esoteric appeal these sites could potentially sell anywhere from $500,000 to $1 million according to Myspace.com estimates.

The lack of inflow of advertising dollars has yet to stop big media companies from buying these large social networking sites for large sums of money. As previously mentioned, Google acquired Youtube.com for $1.65 Billion, while News Corp. bought Myspace.com over a year ago for $580 Million. Mixi, the dominant site in Japan, went public last month with a spectacular debut on the Tokyo Stock Exchange.

I wanted to find out why they were worth that much, because the functionality of the site seems quite simple. The majority of the money paid for these sites was to the rights of the established name/community, which makes sense, as names like Myspace and Facebook are recognizable by almost everyone between the ages of 13-25. Personally, I find it difficult to see why you would pay so much money for a business model that has yet to be proven, but apparently these large corporations know something about them that I don't. Only time will tell!

Posted by brennels at October 30, 2006 09:13 PM

Comments

Posted by: google_success@yahoo.com at November 16, 2006 09:32 AM

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