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What’s driving the surge in social media?

September 10, 2010

Ad spending is expected to jump 20 percent this year

By Diego Vasquez
Aug 20, 2010

Just a few years ago, advertisers were wary of social media, which they struggled to understand. These days, with more than half of the U.S. online population logging on to social networking sites each month, that’s no longer the case. Advertisers are now eager to get on social media, which offers them a chance for direct interaction with their consumers. That’s reflected in the latest forecast from eMarketer, which predicts that 2010 social network spending will rise nearly 20 percent, to $1.68 billion, up from an earlier forecast of $1.3 billion in December. The category will account for almost 7 percent of all online spending, with roughly half that going to Facebook, the world’s biggest social networking site. Twitter’s new advertising model was part of what convinced eMarketer to revise its forecast. The brighter outlook is despite the continued woes at one-time leader MySpace, which is expected to lose millions in ad revenue over the next few years. Debra Aho Williamson, senior analyst at eMarketer, talks to Media Life about why advertisers have come to embrace social networks, why Facebook is so influential, and why MySpace is struggling.

 
Why did you decide to up your forecast from December?

The U.S.’s gradual economic recovery, combined with marketers’ incessant focus on reaching consumers in social media, has led companies to make big increases in social network ad spending in the first half of 2010.

Online ad spending in general has rebounded more quickly than expected. And Facebook—which had 142 million unique visitors in June 2010, according to comScore Media Metrix—and other sites in the social realm are attractive destinations for advertisers looking for both broad reach and sophisticated targeting.

In December 2009, eMarketer believed marketers would spend $1.3 billion on social network advertising in the U.S. in 2010, but the strong performance of Facebook in the first half of this year has resulted in an increased overall forecast.

Also contributing to the increase is the inclusion of Twitter for the first time. The company launched its long-awaited advertising business in the spring and is in the process of rolling out its Promoted Tweet and Promoted Trends concepts. Full deployment is expected by 2011.

Why, when other segments of media are struggling, is social networking booming?

Social networks are benefiting from the fact that online ad spending overall was higher than expected in the first half of the year. In May, eMarketer revised its U.S. online ad spending forecast upward for 2010 and beyond. It now expects 2010 spending to reach $25.1 billion, a 5.5 percent increase from the $23.6 billion it predicted in its December 2009 forecast.

eMarketer’s current social network forecast takes this expected growth into account, but another factor is also at work. For many advertisers, budgets are shifting, and social media in general is taking a greater share of online expenditures.

Have advertisers started to put aside some of the worries they had about social media in the early days? What were those worries?

Marketers want to be where their consumers are, and their consumers are in social networks. eMarketer forecasts that in the U.S., 57.5 percent of internet users will visit social networks on a regular basis (at least once a month). By 2014, we expect that 65.8 percent of internet users will be regular social network users.

That’s not to say that all of marketers’ worries have gone away. They want to have a more personal dialogue with their customers, but they don’t always know how to do that effectively. They also want to use social media to improve their brand reputation, but sometimes that can backfire, if they publish a tweet that is offensive or if they ignore a complaint from a customer.

The worries will continue but they will lessen over time as marketers get better at using social media.

What will be the most important factors in driving social networking spending over the next few years?
 
Marketers will want to be where their customers are. And more importantly, they want to be where people are actively engaging with brands and discussing brands. As Joe Mele, managing director for marketing and media at Razorfish, told me in an interview for my report: “Brands are moving into the space because they believe the volume is there. Clients intuitively believe the audience is important, big and global, and a place where people are talking about brands.”

Why might Twitter see dramatic advertising growth next year?

Twitter rolled out its long-awaited advertising business this past spring, and the first three initiatives—Promoted Tweets, Promoted Trends and @earlybird—are part of several offerings the company is expected to launch this year.

Early advertisers have reported some promising results. Coca-Cola received 86 million impressions in one day when it ran a Promoted Tweet campaign during the soccer World Cup, according to The Financial Times.

We believe ad spending on Twitter will be under $50 million worldwide this year, but it may increase five to tenfold in 2011, if marketers see real value in its ad model, which is based on measuring retweets and user interactions.

MySpace just announced yet another new music-focused initiative in a bid for continued relevance. Why have its fortunes plunged over the past few years when it was once the hottest social networking site?

Ad spending on MySpace keeps falling as the company continues a drawn-out revamp focusing on its core entertainment content. Questions persist about the company’s ongoing viability, including whether its parent News Corp. will spin it off.

Advertisers will spend $347 million worldwide on MySpace this year, according to eMarketer’s forecast, falling to $297 million in 2011. The vast majority of spending will take place in the U.S.; MySpace’s international sales presence has shrunk dramatically over the past few years.

In addition, MySpace this year will lose millions in revenue from a search deal that News Corp. signed with Google, which is set to expire in August. Though News Corp. is seeking a new search partnership with Google, Yahoo! or Microsoft, any new agreement would provide far less ad revenue than the existing deal. In that arrangement, signed in 2006, Google agreed to pay up to $900 million over three and a half years.
 

How much of social networking dollars will be spent on Facebook and why has it become so dominant? What do advertisers like about the site?

In 2010, Facebook will receive half of all social network ad spending in the U.S. and 39 percent of spending worldwide. The company has become an important part of the marketing plan for many marketers, including Procter & Gamble, the U.S.’s largest advertiser. Facebook now has the potential to challenge portals such as AOL, Yahoo! and MSN in revenue.

Advertisers are attracted to Facebook’s sheer size and targeting capabilities, which are based on information that users willingly provide about themselves.
 

Why will worldwide social network advertising start to grow even quicker next year?

Marketers spent $2.5 billion to advertise on social networks worldwide in 2009. eMarketer forecasts that in 2010, ad spending will rise 31 percent to $3.3 billion. In 2011, spending will reach $4.3 billion.

Next year, for the first time, social network ad spending in markets outside the U.S. will be greater than spending within the U.S. eMarketer forecasts that in 2011 advertisers will spend $2.1 billion in the U.S. and $2.2 billion in the rest of the world.

Facebook’s worldwide growth contributes to the overall increase. But there are many social networks outside of Facebook that are attracting both users and revenues.

In China, social networks such as Tencent’s QQ, search giant Baidu’s Baidu Space and RenRen (formerly Xiaonei) dominate usage.

Tencent, a public company, reported $141 million in online advertising revenue in 2009 and $30 million in first quarter 2010.

Mixi, the Japanese social network, has also continued to perform strongly. Its ad revenue increased during its 2009 fiscal year (which ended March 31, 2010) even though the Japanese economy suffered.

In Western Europe and Russia, several midsize social networks have succeeded in maintaining their dominance in their individual markets, even as Facebook has encroached on their territory. Nasza Klasa in Poland, Hyves in the Netherlands, Odnoklassniki in Russia and Netlog—which is based in Belgium but has a Europe-wide presence—all are continuing to grow.

 
Diego Vasquez is a staff writer for Media Life.
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