This is part of IEEE Spectrum's special report on the battle for the future of the social Web.
First thing you do, tear this article out ofthe magazine and carefully set it on fire. It's about the jockeying for position and revenue among the big players in social media: Facebook, Twitter, and Google's YouTube. And the analysis isn't bad for—whaddyacallit—history. But it wasn't written in the past 12 minutes. So more likely than not it's already hilariously out of date. ("Google?" you may be asking, perplexed. In case the brand has in the interim disappeared from the scene, like Webvan and John Tesh, listen up: "Google" was a search engine.)
Probably there's a new serial-killer app in town—CatRattle.com, or some such—that lets users know what everybody else really thinks of them, in real time. Probably sweeping the nation is the phrase "Dude, you've been totally rattled." But just in case events haven't made a mockery out of this exercise, let's try to address three basic questions:
1. If you build it and they come, does that guarantee that there's money to be made? (Hint: No.)
2. Which of Facebook, YouTube, and Twitter will amass the millennium's first megafortune and a borderless virtual state, with a vast population, political influence, economic clout, and a lair in a hollowed-out volcano from which to control the world's weather? (Well, you can probably eliminate Twitter.)
3. The Wall Street valuations of companies like Facebook, which is worth US $85 billion on the secondary market, are stratospheric. Should we stockpile ammo and canned goods for when the bubble bursts? (Not a bad idea; remember Pets.com.)
Once again, addressing such questions is a process both complicated and highly speculative. But let's give it a shot anyway, beginning with a glance at the status quo, and a little arithmetic.
According to the Interactive Advertising Bureau, U.S. advertisers spent $25 billion online in 2010—representing about 15 percent of the $164 billion U.S. ad market and, for the first time, a bit more than their spending on print newspapers. That was no small milestone. But here's the thing: According to eMarketer, 31 percent of Americans' media-consuming timein 2010 was spent online. Which means, speaking broadly, marketers valued new-media time only half as much as old-media time. And that's the rose-colored view. Chris Anderson, curator of the TED Conferences, recently crunched numbers from Nielsen, Forrester Research, the Yankee Group, and other modelers to synthesize the value, medium by medium, of an individual's time. Globally, print publications fetched $1 per hour of reader attention. TV got a quarter for a viewer hour. Online fetched "less than a dime."
Why is online advertising such a poor stepchild? Well, extremely delightful and informative books with pale-blue and white covers have been written on this subject, but let's reduce the problem to its essence: The endless supply of online content means an endless supply of places where ads could go, which by definition depresses demand and, with it, price. Period.
The second problem is more basic still. Ever click on a banner ad? Have you? Ever? Of course not, because why would you leave what you're doing—especially socializing—to go listen to a sales pitch? The click-through rate, industry-wide, is less than 1 percent—and chalk some of that up to mouse error and click fraud. Some advertisers deal with this problem by popping ads into your face, blaring audio, or subjecting you to "preroll" video messages before the video you actually wish to see. As Anderson sagely observed to a Madison Avenue audience, that was an acceptable quid pro quo in the days of passive TV viewing. Online, though, users are active and in control. "If you take control away from them," he said, "they will hate you." Or, put another way: Online, all advertising is spam. These two structural problems leave two possibilities: Either advertising will never be the force in new media that it was in the five predigital centuries (a theory to which I personally subscribe), or someone will crack the code.
The holy grail, if it exists, resides in online advertising's central advantage: the ability to mine data and target individuals with an offer relevant to their lives and interests. In the case of social networks, there is also the ability to target friends of existing customers—what venture capitalist David Pakman calls "the most powerful form of advertising ever created, not counting search." Not only is such targeted advertising on average twice as lucrative as conventional ads, it can fetch 100 times as much revenue as mere spam, the sort that pushes random teeth-whitening miracles and predatory-loan-shilling dancing silhouettes. That's why Pakman believes Facebook's valuation will rise even higher.
"Social networking is a winner-take-all market," Pakman says. "They run the table." His firm recently bankrolled a start-up heavily dependent on Facebook in the social-advertising arena.