Google still waiting for social ad payoff

Google fourth-quarter financial results indicate that making a fortune on social ads may not be as easy as poking a friend.

Elinor Mills Former Staff Writer
Elinor Mills covers Internet security and privacy. She joined CNET News in 2005 after working as a foreign correspondent for Reuters in Portugal and writing for The Industry Standard, the IDG News Service and the Associated Press.
Elinor Mills
4 min read

You may be friending and poking your acquaintances on social networks, but that doesn't mean you are paying attention to the ads. Or, maybe Google just made a bad deal with MySpace in which it guaranteed to pay a lot of money even if you don't click on the ads.

Google's fourth-quarter results missed expectations on Thursday, partly due to a rise in traffic acquisition costs that cut into revenue. Executives acknowledged in a conference call with analysts that they made less money serving up ads on social networks than they expected.

The news, which prompted a drop in the share price after-hours, is a sign that social networks may not be the easy Holy Grail for advertisers once believed to be.

"When you have the largest online advertising player with the most advanced monetization tool set out there talking about challenges monetizing certain types of pages, yeah, it would seem to be an indication of a broader industry issue," said Derek Brown, an analyst at Cantor Fitzgerald.

Microsoft, for its part, isn't seeing the same thing as its chief rival. A Microsoft executive told CNET News.com on Thursday that monetization rates are good and have been steadily rising since the company first began feeding ads to Facebook in mid-2006.

Google executives declined to specify exactly what the problem is. Chief Financial Officer George Reyes referred to "a few AdSense partners" to whom Google is required to make guaranteed payments. "We have found that social-networking inventory is not monetizing as well as expected," he said.

Under further questioning, co-founder Sergey Brin said the company was disappointed in experiments it had run on some of the approximately 20 social networks it works with, which include MySpace and its own Orkut.

"I don't think we have the killer best way to advertise and monetize social networks yet," Brin said. "It's a big opportunity because it's so much inventory."

MySpace executives were not available for comment Thursday night and a Facebook spokesman did not return a call seeking comment.

While MySpace.com has a 72 percent market share in the U.S. and Facebook has 16 percent, Facebook rose 50 percent over the last year and MySpace dropped 8 percent, according to Hitwise.

Back in August 2006, when News Corp.'s MySpace was the top social-networking site with 100 million members, Google beat Yahoo and Microsoft for the opportunity to supply ads and search to the start-up. Under the deal, Google promised to pay $900 million over three years as long as certain traffic requirements were met.

Within weeks, Microsoft had signed a deal to supply banner ads in the U.S. on Facebook, which had about 9 million members at the time. Terms of the deal were not disclosed. Then in October, Microsoft agreed to pay $240 million for a stake in Facebook and the ad deal was expanded to include all types of ads and reach globally.

Although Microsoft won't say whether the company made any revenue guarantees to Facebook, Brin has suggested as much. "Some of our competitors might be willing to spend very large amounts of money...and we're really interested in doing sustainable economic deals, so we would rather not participate in those sorts of transactions," he told journalists at Google Analyst Day in response to questions about Microsoft's expanded Facebook.

Regardless of what the terms were, the outcome appears to be different, according to Microsoft's Jon Tinter, who was among the executives who brokered the Facebook deal.

"Generally speaking, we don't share Google's point of view," Tinter said in an interview. "We are very happy with the performance of advertising in social networks, both if you look at our third-party partnerships with companies like Facebook or on our own sites, like (Windows Live) Spaces...Since we signed the original Facebook deal we have seen steady improvement in the monetization rates."

Part of the disparity between Microsoft and Google's experiences, he said, could be due to the fact that the companies are doing things differently.

"What Google has essentially attempted to do is take the AdSense approach and put it on MySpace," Tinter said, while Microsoft has been trying a range of advertising, including contextual and display ads.

"We've gotten better at targeting the advertisements. We've gotten better at how we sell it and package it for advertisers," Tinter added. "I think we've tried a more adaptive approach then they necessarily have."

Mark May of Needham & Co. said the jury is still out on social networks as an advertising platform.

"Social networks today, much like e-mail, are utility-like and often used as a communications platform. These types of channels have never monetized well with advertising," he said. "This will improve but it will take a lot of time."

CNET News.com's Ina Fried contributed to this report.