Social networking buzz belies an impending sector shakeout, according to In-Stat’s "Social Networking: Finding Friends Online" report. The report says membership and monetization are key issues for social networking sites.

"In order for a social networking site to be successful, it must attain a critical mass, and competition is fierce to attract new members," says Jill Meyers of In-Stat. "So far, sites have focused their attention on a younger demographic, which is finite, fickle and limited in expendable income." Ms. Meyers says Baby Boomers are frequently overlooked when it comes to social networks.

MySpace’s demographics include plenty of wage earners at this point, and Boomers have social networks like Eons.com, but the In-Stat report raises an important question: How can social networks best monetize their memberships? eMarketer estimates that 2007 ad spending on MySpace will outstrip spending on all other social networks combined, so competition will be fierce.

One possibility is selling user data, according to In-Stat.

"Each social networking site collects a plethora of personal and demographic data on each member," said Ms. Meyers, "and while selling these data to target marketing groups may be unappealing to site members, it may be the best route to profitability for site operators."

Some social networks are still having trouble just getting their sites to grow. comScore Media Metrix data reveals a range of visitor growth of anywhere from 1177% (Sconex.com) to -40% (LiveJournal.com).

Even Microsoft is offering advice on how to increase social networking ad revenue. The Microsoft Digital Advertising Solutions Group commissioned a Metrix Lab study of how social networkers use the sites. The study concluded that creating brand profiles (spaces) that can be forwarded to friends is effective, with a quarter of social networkers posting views on specific ads and a third forwarding spaces, ads or links.

eMarketer senior analyst Debra Aho Williamson says that the time for branded profiles is probably coming to a close.

"The notion of creating a MySpace ad profile page and collecting friends was popular in 2006 but will likely give way this year, as users tire of collecting ‘friends,’" says Ms. Williamson.

Third-party companies are also developing sophisticated modeling software to parse the things people write on their profiles and match ads accordingly.

However, there is a risk that innovative ad models like these will get shelved in order to give advertisers something they’re already comfortable with. MySpace sells "roadblocks" on its home page and even uses old-media speak to explain why advertisers like being there: "Marketers are really interested in the one-day cume they can get from the home page of MySpace," Fox Interactive Media told eMarketer last year.

While such things will generate revenue, they fall short of the promise of the "one-to-one-to-many" nature of social networking.

Via eMarketer

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