Social networks might be popular, but the industry is struggling to find a way to turn all those users into a big payday. This conundrum is the focus of industry executives gathered at the Social Ad Summit in New York this week, and while no company has yet found the perfect solution, advertising campaigns that make far better use of social-network functionality are starting to offer hope of richer returns.

According to Michael Lazerow, founder of social-advertising company Buddy Media, 37 percent of adult Internet users (and 70 percent of teens) in the United States use social-networking sites regularly. Meanwhile, less than 1 percent of all digital-advertising budgets currently flows to social-media sites.

Share of advertising investment might be slim today, but many executives are optimistic about the future. "It seems a little like the search industry was in the mid to late '90s," says Martin Green, chief operating officer of instant-messaging company Meebo. During this period--before Google developed its lucrative search advertising model--many search engines found it hard to make money. But search engines are, of course, very different from social-networking sites. Someone using Google may very well be in the right mood to buy something, but people visit social sites to spend time with their friends. Mike Trigg, director of marketing for the social network hi5, says that advertisers have to ask whether an ad campaign resonates with the reasons why users come to social sites in the first place. "The campaigns we're seeing have the most success are very interactive," Trigg says.

To exploit this, advertisers are turning to social-network programming tools like Facebook Platform and OpenSocial. Buddy Media builds applications for advertisers that are a far cry from simple banner ads. One Facebook application, RUN-Dezvous, created for sports-shoe maker New Balance, is a running game that encourages users to challenge their friends to a virtual race. Points earned through the game can even be converted into credit toward a pair of the company's sneakers. Another application, Launch a Package (an advertisement for FedEx), lets friends share large files by "flinging them" to each other using a gamelike interface.

But to make social advertisements truly engaging, advertisers need to better understand how to grab, and hold on to, users' attention. Ian Swanson, CEO of Sometrics, a company that provides tools for measuring social-advertising success, says that user response to banner advertising tends to plummet dramatically after the first five page views. For this reason, Swanson says, efforts to integrate ads with the actions that users want to take on the site are particularly important. Buddy Media's Lazerow adds that in the future, advertising applications will need to be even more complex and scalable so that they can handle large numbers of users if necessary.

For the time being, however, advertising money is spread pretty thin across social networks. Many developers see advertising as a way to make cash from their programs. Advertising firms are also looking to either build applications or hire companies to do it for them. Don Steele, vice president of digital marketing at MTV Networks, says that the company has spent half a million dollars advertising on social networks this year--a relatively small number, considering the size of the company and its advertising efforts.

Although much of the focus has been on advertising, a few experts have raised the idea that some users might be willing to pay subscription fees to use applications. Clara Shih is the director of the AppExchange product line at Salesforce.com, which provides an online marketplace for business applications. While business users tend to be more willing to accept the idea of paying for third-party applications, she believes that the same might be true of some social-network users. This could very well free social networks from the need to woo advertisers at all.