The success of many social media companies is tied to online advertising. But the business model just isn't there yet, ad executives say.
MOUNTAIN VIEW, Calif.--Reality check: half of the social media start-ups at Tuesday's Under the Radar Conference won't exist next year.
That was the dour prediction of an advertising executive after a day of start-up presentations from a tongue-twisting list of tech companies--including Verismo, Mytopia, Loud3R, Jacked, Sometrics and PutPlace.
Not that the start-up pitches were boring or hard to swallow. It's just that similar to the dot-com heyday (and eventual bust), the success of many social media companies is tied to online advertising spending. And guess what, after nearly 10 years of hand-wringing over Internet advertising models, traditional brands are still not spending the many millions of dollars online that they regularly do on TV commercials.
Even more relevant to social media is that traditional advertisers are especially cautious when it comes to the idea that their brand logo might appear next to an image of a marijuana leaf posted by a 16-year-old. Never mind that Facebook's audience rivals that of some television networks.
"Take a look at history, and the way Web 1.0 worked...publishers didn't make it until the ad dollars started to scale. The same mistakes are being made in the social media space today," said Jeff Stiers, senior vice president of business growth for JWT, a major traditional advertising agency that was founded in 1864.
His skepticism--and hope for Internet advertising--was matched by other ad executives on the panel, which included Tom Bedecarre, CEO of digital advertising agency AKQA, and Chris Colborn, executive vice president of its rival R/GA. Internet companies must take the hand of traditional advertisers to get them to spend online, the executives said. But they agreed that there's continued uncertainty in interactive advertising and reluctance on the part of big advertisers.
Like with Web 1.0 companies, one of the biggest problems social media companies have in the market is that they're technology driven, the executives said. Tech companies often fail to hire media-savvy executives at the top who can sell brand advertising.
Another Web 1.0-like problem: many social media start-ups are marketing the idea that they have tons of data on people's demographics and preferences. The start-ups believe that that data will lure brand managers seeking to reach new customers. Not true, executives said.
"I can't imagine a large agency giving a rat about a small firm's data. Advertisers are looking for aggregation of data...and someone at a very high level to give an overview (of what it means)," said Bedecarre.
One member of the audience, an executive from news site Topix, asked the panelists when a major advertiser would announce plans to spend $20 million sponsoring AOL or Facebook. Bedecarre answered that that kind of deal doesn't translate on Facebook because brands are too used to ads that broadcast to, instead of engage, audiences. They're still not willing to spend many millions of dollars on major Web sites, he said.
"It hasn't happened yet because big advertisers and agencies haven't let go of advertisements. They like to buy lots of ads," he said, referring to commercials.
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