The Wall Street Journal-20080205-Social Sites Don-t Deliver Big Ad Gains

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Social Sites Don't Deliver Big Ad Gains

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As Microsoft Corp. makes a $44.6 billion bet on Internet advertising with its unsolicited offer for Yahoo Inc., there are signs that some of the biggest new places where consumers are flocking on the Web -- social networking and video-sharing sites -- are yielding advertising revenue slower than some Internet companies had hoped.

The latest warning that the hottest Web properties are proving difficult to make money from came from Internet giant Google Inc. While announcing disappointing fourth-quarter earnings Thursday, Google executives said the company was having a harder time than it expected generating ad revenue on social-networking sites and figuring out the best ad formats for its YouTube video-sharing service. Social- networking phenomenon Facebook Inc. also has been publicly grappling with how to make money amid its massive spurt in usage. Microsoft, which owns a 1.6% stake in Facebook, has a long-term deal to sell ads that appear on the site -- and analysts estimate that arrangement is losing money for Microsoft.

The challenges of making money from social networking and user- submitted videos are potentially significant for Microsoft as it pursues Yahoo. A central focus of Microsoft's efforts is to access Yahoo's 500 million-strong global user base and combine the online ad systems of the two companies.

The slower-going also adds uncertainty at a moment when many are anxious that a broader consumer slowdown could crimp online ad growth. While Yahoo last week said 2008 was starting out solidly for the company, it saw weaker online ad spending in the fourth quarter among some categories of advertisers -- such as finance, travel and retail -- affected by broader economic issues. Since advertising on social- networking and video-sharing sites is still largely experimental for marketers, it could be more vulnerable in an ad-spending pullback.

Not everyone agrees. Jon Tinter, general manager of strategy and business development in Microsoft's online services group, said the Redmond, Wash., company doesn't share Google's observations about generating ad revenue, particularly in the area of social networking, where Microsoft is "seeing steady improvement in monetization." He said Microsoft's approach included selling ads on social networks as part of broader ad packages.

To be sure, the bulk of online advertising revenue comes from areas other than video-sharing and social networking.

A Yahoo spokeswoman said its board "is carefully and thoroughly evaluating the Microsoft proposal in the context of all of the company's strategic alternatives."

Google and other ad industry executives say they are optimistic they will get past any setbacks in wringing revenue from the hot social networking and video areas. Spending on ads on social-networking sites in the U.S., for one, will increase 70% this year to $1.56 billion, decelerating to a 29% increase to $2.02 billion in 2009, estimates research firm eMarketer Inc.

"It's taken longer than I thought for us to find the right combinations" of advertising formats, said Google CEO Eric Schmidt in an interview last week, referring to advertising on YouTube. But, he said, he believed it "will ultimately be very, very successful for [Google] and the industry."

One key will be the speed at which advertisers ramp up their spending in these areas. Another issue is advertiser comfort with having their ads displayed alongside less-predictable content. Some advertisers say sites such as YouTube, where most clips are uploaded by users and can run the gamut from raunchy to poor video quality, still lack enough videos where mainstream advertisers are comfortable running their ads.

For example, New Line Cinema created an ad campaign on YouTube last summer to promote its movie "Hairspray." While New Line found that the ads performed well, it has had a hard time finding enough relevant videos on YouTube where it could put its ads. Internet and media companies report that they are having success selling ads next to commercial video, such as television shows and clips.

General Motors Corp. also has hesitated to run video ads next to videos uploaded by users. The auto maker is testing advertising on social-networking and online-video sites. But "when you're in a testing and learning phase, it doesn't lead to consistency in every campaign," says Curt Hecht, executive vice president and chief digital officer for GM Planworks and Starcom Mediavest Group. "That doesn't translate to ad spending or revenue."

Facebook had 2007 revenue of about $150 million, half of it from its deal with Microsoft. Facebook also sold its own ads to companies; advertisers have reported mixed results. "The approach to advertising for social media is going to need to be different than it has been for other sites," says Owen Van Natta, Facebook's chief revenue officer.

Google sells advertising that appears on News Corp.'s MySpace.com social-networking site as part of a three-year contract under which it guaranteed $900 million in payments to News Corp. Google declined to comment on MySpace specifically last week, but hinted the revenue from such an arrangement wasn't covering the guaranteed payments. Google co-founder Sergey Brin told analysts, "We have had a challenge with social networking inventory as a whole and some of the monetization work we were doing there didn't pan out as well as we had hoped." On its earnings call yesterday, News Corp. executives said they were pleased with revenue growth for the fiscal second quarter at Fox Interactive Media, MySpace's parent division, which rose 87% from the year-earlier period, to $233 million. (News Corp. is the owner of Dow Jones & Co., publisher of The Wall Street Journal.)

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Jessica E. Vascellaro contributed to this article