The Looming Ice Age for Social Network Giants

With Facebook just overtaking MySpace in the social networking supremecy race, many believe things are pretty good for the two top dogs.  However, there are those that believe hard times are ahead for the big networks, as smaller and more focused networks steal the attention and affections of advertisers. 

I read a post the other day by Om Malik on the direction of advertising on social networks that really caught my attention.  As Malik sees it, there are a few factors that will contribute to the inevitable downfall of the big social networking players. 

First, new traffic to sites like Facebook and MySpace is beginning to plateau; the remaining growth to such sites is coming largely from users outside the United States, but that is a relative trickle of growth in comparison to the huge adoption the sites experienced from within the U.S. 

A second problem for the large networks is that advertisers are having a hard time monetizing the massive traffic revenue such sites demand.  Obviously, the ad revenue has to come from somewhere, and advertisers are finding that "targeted" ads aren't really panning out on the mainstream networks like they anticipated.  For smaller networks or websites, it isn't a huge loss if viewers aren't constantly following advertisements; however, when millions upon millions of users ignore advertisements, advertisers struggle to generate the funds to pay for the huge traffic.  Google is one of the only companies that might easily pay the huge bills, but I wouldn't count on Google writing Zuckerburg blank checks anytime in the near future.

This is where things will get really sticky for the big guys.  With many smaller websites implementing social features these days, advertisers are drawn to the more focused communities topical sites draw.  For advertisers, it would seem a pretty simple decision: do we pay out the whazoo for inneffective ads on Facebook or MySpace, or do we target arguably more effective ads at very concentrated user groups?  Beyond that, advertisers don't stand to lose as much if the ads don't catch traction on the little guys in comparison to the huge networks.  For those that haven't jumped on the social bus, there's no time like the present . 

Additionally, the implementation of social functionality at focused and topical sites will contribute to plateauing the traffic to large social networks.  Users enjoy being parts of tighter communities.  Sure, Facebook has its groups, and MySpace has its…well…busy backgrounds, but neither holds a match to smaller and more focused communities dedicated to users' specific mutual interest.  

Those factors are already starting to play out.  Researchers have dropped estimated advertisement expenditures for social networks to $1.43 billion in 2008 from $1.6 billion in 2007.  Granted, that does lower expenditures to the smaller players, but Facebook and MySpace comprise the largest portion of that estimate, which will sting a bit when their respective paydays roll around.  

Though they are still the big dogs in social networking, being on top might come back to bite Facebook and MySpace as advertisers redirect attention and resources to smaller and more focused social sites.  Best thing to do now is start preparing for the winter, lock down the hatches, and go back to the drawing board in hopes of finding a way to maintain growth in this next era of social media.