This years $900 million MySpace–Google search deal is a huge setback for Social Networking and User Generated Content sites. The proof is last month’s projections that MySpace will add as much as $15 billion to the valuation of News Corp.
This deal was a win-win blockbuster. Murdoch got more in revenue than he paid for MySpace and Google locked in one of the most popular sites in the world along with a great demographic of younger users, effectively blocking its competitors. Yahoo is talking to FaceBook about a $1 billion acquisition.
How can this arrangement be a HUGE setback for Social Media sites? Simple, the search advertising revenue model and artificial valuations distorts the focus of Social Networking sites and User Generated Content sites and turns them into giant affiliate sites for search advertising.
News Corp bought MySpace cheap and they appear to be avoiding big changes so far. As the leader in the space, they are able to be very selective. The only apparent difference is who powers the search box at the top of the page. I am not aware of any data about how much revenue has been delivered through the Google deal, but MySpace clearly continues to grow. It is now one of the most popular sites in the world.
For competing sites with shallower pockets and smaller market share, the need to generate revenue will inevitably compromise the user experience. CPC advertising revenue is a great model—for a search engine. When a community site depends on driving search queries for revenue, it takes the emphasis away from the user’s reason for coming to the site. The site sacrifices whatever makes it unique in favor of a generic user experience.
Social Networking sites are very appealing to the traditional agency mindset that focuses on demographics and building brand. As a Search Engine Marketer, I create and manage ROI driven campaigns. I almost always advise my clients to opt out of the search partnerships and always avoid content matching. In my experience, as soon as you stray from keyword search on a search engine to include search network partners, the ROI begins to drop. Include content match and click through rates and ROI plummets. As web analytics get better, more and more advertisers will either opt out of traffic from network search or the market will devalue those clicks in line with their lower ROI.
Pay Per Click from a search engine produces staggering revenue and ROI for advertisers because users come to an engine looking for goods and services searching for specific keywords that trigger relevant ads. The advertiser decides exactly what to bid on and what text to display for each keyword. The value of keyword search traffic is very high to both the search engines and to PPC advertisers because the USER gets a positive experience.
Social Networking and User Generated Content sites need to develop their own revenue streams based on the characteristics that synthesize their communities. They need to identify specific markets for which they understand user affinity and then figure out how to monetize delivery of relevant content that enhances the user experience. For example, if a site encourages users to list their favorite type of music or musical artists, they could partner with labels, artists or music promoters in each city to sell tickets to the show. Even better, they could negotiate for access to presale tickets and/or a special section in the arena for their members and let users create a buzz around the event.
The inflated valuations caused by this deal may be even more devastating in the long run. Slapping a $1 billion price tag on an immature site with a tons of users puts a lot of pressure on management to cash in. A site that was organically evolving through the interaction with users and slowly approaching profitability is suddenly an entity on the auction block. If the site is sold, it creates an all consuming demand to generate revenue.
Long before anyone coined the terms “Social Networking” or “User Generated Content,” one of the first (and still the best*) community sites was www.Craigslist.org. The site was founded by Craig Newmark, an unusual person with an almost unheard of lack of desire to cash in. Craig has stated on many occasions that the site is nothing without the user community. His title is Founder, Chairman, Customer Service Representative. Craigslist operates as a not for profit entity that has grown organically, with a limited revenue model, a sparse user interface and a fanatically loyal user base who police the site. They have about 20 employees and resist the siren song of growing revenue through advertising, affiliate programs, co-marketing, etc. Ebay bought a minority stake a few years ago but has lived by the agreement they made with the founder to be hands off and not demand a cash return. If Craigslist suddenly sold for the $10-20 billion it would be worth on the open market, the site would have to start generating a few billion dollars a year and fundamentally change the community that created it.
*Full disclosure requires me to state that I have used Craigslist for the last nine years. I met my wife through Craigslist, found a few house mates, a job, and bought things including a hot tub, a pool table, furniture, and Giants tickets. I dream that some day one of my posts will be voted to the “best-of-craigslist” archives.