SOCIAL NETWORKS > Video, social networks to surge in '07

October 24, 2006Audiences and ad dollars always meet .I recall years ago, when search was considered a commodity.


Companies like Inktomi moved into the caching business, while others -- Yahoo (YHOO), Lycos, Excite, AltaVista, etc. --quickly morphed into portals or were buried in other entities. The ad dollars would flow abundantly to portals, and transaction fees to online retailers, so most believed. Back in 2000, nearly $3.8 billion went into display ads vs. $109 million in paid search in the U.S., according to eMarketer.



The funny thing is that many people were searching. Search engines Yahoo, Lycos, Excite, Netscape, AltaVista were ranked in the top 15 most popular Web sites back in 2000, according to Nielsen//NetRatings. To be sure, the search experience was awful, especially compared to our expectations today. But that didn't mean the search engines weren't attracting the crowds. They were. They just weren't attracting the ad dollars, because the search engines were too busy selling ads for the audiences going to their plate of services from online shopping, news, email and, etc.



Today, as everyone knows, search dominates. The gap between audience and ad dollars narrowed. In 2006, Google (GOOG) alone is estimated to generate some net $7.3 billion in revenue, much of that comes from paid search.



The same imbalance seems to be happening with social networks and video-sharing sites.



In the past year, social networks and video-sharing sites have come into prominence. As measured by page views, MySpace is the No. 2 most popular site while Facebook is tied with Amazon.com (AMZN) at No. 10, according to Nielsen//NetRatings. By unique visitors, YouTube ranks No. 15.



Social networks are estimated to attract $280 million in ad dollars this year, according to eMarketer. Online video-sharing sites are estimated to attract about $385 million. EMarketer estimates that $15.9 billion will be spent in online advertisements in the U.S. this year. That means social networks and video-sharing sites only attract about 1.8% to 2.5% of total online ad spending.



Will the gap close? It's my bet.



The simple analysis I laid out above was part of the reason I chose News Corp (NWS) and Google as two of my stocks picks during a luncheon panel before a number of investors at the Money Show last Wednesday. The show drew an audience of 8,000. At the time, Google was $420. I hadn't been upbeat about Google ever since February of this year when I wrote that I'd pass on buying Google at $400 in a negative column titled: Playing Google poker. See Net Sense: Playing Google poker.



While I had not been bullish on Google since then, I told the audience that it was only after Google bought YouTube that I turned positive.



The reason is because YouTube is not only a video-sharing site, but a social network. These are two areas of significant growth in the coming years that Google can now play a big part in. And, at $1.65 billion (price it paid for YouTube), Google's paying a small percent of its market cap for a space waiting to explode in advertising bucks. I had to debate someone on the panel who said he was shorting Google because of the risk of a recession and the subsequent decline in advertising dollars as a result of an economic slowdown. I won't say his name, but I'm pretty sure he had to cover his Google short.



Of course, Google is positioned in the biggest social network as well through its relationship with MySpace, owned by News Corp. I like News Corp for the same reason. It's positioned in two of the fastest-growing areas on the Web, thanks to MySpace. Plus, News Corp has its own library of copyrighted content and its own video technology.



Now, of course, there are still many questions to answer, not the least of which is how to advertise in environments where the audience is conditioned to control their space, and be out of control whenever they choose to be. That uncertainty has advertisers scratching their heads. This question was what I explored on two panels I had to moderate last week.



On one panel I moderated, David Grubb, who oversees nearly $1 billion of media buys for Microsoft (MSFT), was a panelist. On another panel I moderated, Gokul Rajaram, a product management director at Google, and James Speer, who oversees InterActiveCorp's (IACI) search and media advertising solutions, were panelists.



After sitting on these panels, I have to say, no one has the answer yet, or no one wanted to share what they believe may be the answer. What was clear to me, however, was that they were all "experimenting" in some way, and it's only a matter of time when the industry will figure it out.



Back in 2000, people were searching but no one made money on search until Google showed the world how to monetize it. The gap took a few years to close.



This gap may close faster because the monetization is already happening to some extent. Facebook will be receiving about $200 million worth of ad dollars guaranteed by MSN over several years. And, MySpace will receive $900 million over three years and nine months from Google.



The key of course is how those advertisements will appear. Will the ads be targeted based on the information I provide, the searches I conduct, my behavior, my friends, or all of the above? Will I as the consumer choose the ads, or will they choose me? Will I share in the ad proceeds?



Whatever the answer, I'm sure the industry will find a way. And, Google seems to be serious about being the first one to figure it out.
Tags : Excite, Lycos, Yahoo, altavista, investment, networks, social, video