Show me the money!

I’ve had quite an eventful trip to the United States (still here), attending both the Commission Junction University Conference and TechCrunch40 — two seriously great conferences. I met hundreds of people, saw dozens of companies and handed out and received countless business cards. It was great fun — there is coverage on my personal blog of the TechCruch40 conference here and the CJU here.

I have never seen so many niche social networks in my life! There was even one that allows you to have your friends send wake-up messages to you — what next? I had the opportunity to sit through a talk by Mark Papia, one of the execs at MySpace, on how it is gearing up its advertising division.

So, the bottom line is: there is a social network bubble forming! I’m certain of it — Web 2.0 is fine, but everyone thinks that if you put a social networking spin on a business model, that it’s an automatic success — and it probably has helped get money from VCs. And yes, there will be some successes — Google was a success from the dotcom era, but for every Google, there were a hundred Napsters.

I gave Mark Papia a bit of a grilling at the CJU, and he couldn’t answer me (in front of 1 000 people) with a straight face (he was umming, aahing and deferring to his colleagues) on where the return on investment (ROI) is on the advertising on MySpace (and this equally applied to Facebook). There was some waffle about “momentum marketing”, which is basically a synonym for “immeasurable advertising”.

The reality is that social networks do not currently drive proper ROI for their advertisers, and the only way they are making money right now is through churn-and-burn advertising (people wanting to test it out). My entire business life online has been based on the premise that advertisers need to achieve a positive ROI for their online advertising spend.

The conversion numbers and metrics do not currently justify the level of spend at present. I’ve written extensively on what the value of social networks such as Facebook is, and it specifically mentions that the value is in the data and the use thereof to target users on third-party sites, à la Google AdSense. Facebook would do well to partner with Microsoft AdCenter for its demographic targeting platform.

The problem you have right now is that there are far too many “newbies” to online marketing joining the foray into the social networking phenomenon, without a solid background in online advertising and what drove the growth over the past few years — it’s like trying to do a PhD in physics without having done Maths 100.

I consider myself an online advertising veteran, having spent millions of dollars and generated hundreds of millions of dollars in online revenue through advertising online for many years, and I can tell you that most of these networks will fail, as the costs of running them far exceed that value they ad to advertisers — hence, they are uneconomical based upon their expected ROI for advertisers. This is probably true for 90% of the networks out there.

Page views mean absolutely nothing, except to tell one how sticky a website is — in fact, I’d argue that the more sticky the website, the less likely that people will click on the adverts. “Brand” advertisers don’t require ROI, but the reality is that building your brand using a social network needs to have a level of scale that translates into a better ROI than other more established online channels, such as email and search — both of which are often neglected in favour of “cool stuff” such as social network advertising.

If advertisers start moving their dollars inefficiently into the wrong channels, it will create an unsustainable revenue bubble. This is going to lead us down a path of the dotnet crash (you heard it here first! The crash that will ensue for social networks will henceforth be known as the (social).net collapse).

Maybe I’m just being a bit too hard-lined, but after seeing them multitude of social networks at the conferences, I’m convinced that not many of them have sustainable advertising models, as they don’t have the scale required or the ROI that advertisers need. I need more data to substantiate, but this is just a hunch from chatting to many of them. People don’t want to pay for content online any more — so that model is out (ask Rupert Murdoch!).

So, the next time a social network tries to sell you advertising, ask it for a minimum ROI guarantee, but don’t hold your breath.

A word of age-old Latin advice for those looking to advertise on social networks and the like: caveat emptor