The Economist Takes Social Networks Down a Peg

Nate Elliott | October 24, 2007, 03:18 PM

From last week's issue, in an article called "Social graph-iti: There's less to Facebook and other social networks than meets the eye":

From an advertiser's point of view, says Rishad Tobaccowala, the boss of Denuo, the new-media unit of Publicis Groupe, an advertising company, Facebook is so far anything but the new Google. The search giant does have traditional network effects in its advertising system, he says: it aggregates advertisers and sends them to potential customers who have expressed specific intentions by typing search queries. But Facebook has only “large crowds who are communicating without expressing specific interests”, says Mr Tobaccowala. On Google, advertisements are valued; on Facebook they are an annoyance that users ignore.

Facebook might nonetheless be suited for other sorts of marketing. Reuben Steiger, the founder of Millions of Us, a marketing agency for social networks and virtual worlds, says that brands need to design “experiences” that use the social graph to engage groups of friends. If a wrestling association, say, wants to drum up ticket sales for an upcoming bout, it could build a widget that turns users into wrestlers and lets them fight bad guys and win gifts, while making them aware of the brand and the match. But that possibility hardly justifies the sorts of valuations bandied around for Facebook and other social networks.

Ouch. We don't talk about valuations or the like, but I can agree with them on this point: social networks' revenue models to date have indeed been mostly about massive amounts of bulk inventory, and that bulk inventory isn't anywhere near as valuable to advertisers as, say, paid search listings. The question is, how well can the social networks refine their targeting in order to close that gap in value -- or if not in actual value, then at least in price?