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MySpace Might Have Friends, But It Wants Ad Money

Brian Stelter|The New York Times
Monday, 16 Jun 2008 | 4:04 AM ET

When the News Corporation added MySpace to its portfolio nearly three years ago, it expected that if its base of 16 million users kept growing — and each user kept adding friends, sharing photos and swapping flirty messages — the advertising dollars would roll in.

The social networking site has grown — to 118 million worldwide users — and the flirtations have not stopped. But the cash is not coming in as quickly as the company had hoped.

In the fiscal year that ends in two weeks, the News Corporation unit that encompasses MySpace will miss its $1 billion revenue target. When the News Corporation announced the projected shortfall in April, several analysts downgraded the company, sending shares down 5 percent.

With an eye toward monetization, MySpace is being redesigned beginning Wednesday with a new home page, which will be less cluttered and more hospitable to advertising. (The home page will also feature a “splash page” for an ad about the new Batman movie, “The Dark Knight.”) The redesign, to be done by early fall, will include a new navigation bar, search tool and video player.

MySpace
MySpace

The redesign is intended to address a problem of social networking sites, which is that many user pages have the aesthetic appeal of a 14-year-old’s high-school locker. But there are still many questions left about the advertising value of social networks.

In the last few months, the bloom has come off social networking’s rose. MySpace and its chief competitors, Facebook and Bebo, all have ambitious plans for making money but not enough proof that the plans are working.

“The jury’s still out on MySpace’s ability to monetize,” said Michael Nathanson, an analyst at Sanford C. Bernstein & Company.

The sites seem desirable to advertisers based on the traffic they receive. MySpace has an American audience of 73 million, and Facebook counts 36 million, according to comScore. (Worldwide, Facebook tied MySpace for the first time in April, averaging about 115 million users for each site.) Users spend hours on the sites.

But because MySpace commands a majority of all the money spent on social networking, it is viewed as a bellwether for the growing industry.

On a conference call last month, Peter Chernin, president and chief operating officer for the News Corporation, toned down the grandiose expectations for social networking advertising and acknowledged that selling spots on personal profile and group pages is not easy.

Social networking represents an “entirely new form of Internet activity,” Mr. Chernin said.

When MySpace’s parent, Fox Interactive Media, announced a three-year, $900 million advertising pact with Google in 2006, analysts started placing big bets that social networking would be a major new revenue stream. While the Web is becoming more social, it is hard to wring profits from it.

Indeed, the balloon of unrealistic prospects is losing air. The attitude change was first detected at the end of January when, one year into its $900 million pact with MySpace, Google said that social networking inventory was not earning money as well as expected. (More recently, Google said the situation was improving.)

The attitude change was confirmed in April when Fox Interactive Media said that it would miss its revenue target. By then, the chief revenue officer for the unit had been dismissed.

Mr. Nathanson, the analyst, said that MySpace’s perceived shortfall had been frustrating. “We don’t have much conviction in the long-term ability to grow this business based on what we’ve seen lately,” he said.

Other analysts hold a more bullish view. Anthony DiClemente of Lehman Brothers recommended the News Corporation’s stock on Friday partly because of MySpace’s 25 to 30 percent year-over-year revenue growth.

MySpace, naturally, agrees with the more optimistic view.

“We’re seeing the dollars come in,” said Jeff Berman, who was promoted to president of sales and marketing for MySpace in April, when Fox Interactive Media’s sales force was rearranged. Revenue per user is said to be up 50 percent over last year, but the site is still making only about $6 to $7 per user per year.

EMarketer estimates that MySpace will post $755 million in revenue in the fiscal year ending June 30.

MySpace would not comment on the estimate. About a third of the revenue is expected to come from the Google ad pact. For the year, Facebook is estimated to earn $265 million in ad revenue.

The companies are acting swiftly to solve the social networking riddle. MySpace is constantly issuing press releases on new features or partnerships. The site is keen on hypertargeting, which places users in “buckets,” based on their interests, and delivers ads accordingly. Nearly a third of the buys on MySpace are hypertargeted now, Mr. Berman said.

Facebook has a similar targeting system, called social ads. Advertisers choose an audience — say, Florida college students who watch “SportsCenter” on ESPN; there are 10,680 Florida college students on Facebook — then create a simple ad and set a budget. MySpace’s version, called SelfServe, is being beta-tested.

Bebo, the third-largest social network site in the United States, was bought by AOL, a unit of Time Warner , last month.

The company said that it intended to use AOL’s advertising entity to monetize the site.

But for many media buyers, these advertising models remain experimental. At the same time, ad budgets are softening. Last December, eMarketer forecasted $1.6 billion in social network spending in 2008. In April, it revised that figure to $1.4 billion.

“The challenge is that all these new forms of advertising are more difficult to plan, measure and quantify than advertisers are used to, and that has impacted spending growth,” Debra Aho Williamson, an eMarketer analyst, wrote in April.

Mr. Berman of MySpace said that “with new advertisers, there is certainly an education process,” and that the sales staff was trying to oblige the advertisers. For example, executives from Procter & Gamble visited MySpace’s headquarters in April for meetings about social network advertising strategies.

Yet there are concerns that social network users do not view ads, no matter how carefully the ads are placed. “Users’ attentions are the most scarce element on most social networks,” Chamath Palihapitiya, the vice president for product marketing at Facebook, said. “A successful ad product has to capture that scarce attention and engage it in a way that’s social and relevant.”

So what can speed up ad fortunes for social networks? Social ads are Facebook’s first step. They can take social actions, such as a user’s identifying himself as a Nike fan, and pair it with an ad tailored to that user’s friends. “Your friend is a fan of Nike,” the ad would say.

“Making ad campaigns even more effective on the site is part of what we’re doing” with the changes, Mr. Berman said.

He noted that home-page ad displays, like last Thursday’s for “The Incredible Hulk” and this Wednesday’s for “The Dark Knight,” can reach 40 million users on a given day, “bigger than the biggest broadcast television shows.” Chris DeWolfe, the president of MySpace, thinks the skeptics should take a deep breath. “We are far ahead of where Google or Yahoo were at this stage of growth,” Mr. DeWolfe said.

Mr. Palihapitiya of Facebook takes a similar view. “This is a journey that is going to unfold over the next five to 10 years. That’s when the winners will emerge,” he said.

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