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Advertisers Flock to Social Networks

With Facebook leading the pack, social networking is aiming to catch up to the $25 billion worldwide business in search ads. Facebook has more than 600 million active users who log on at least once a month, constituting a market so appealing to advertisers that the company’s value is estimated to be a breathtaking $50 billion to $65 billion.

Ringing the bell: Investors are eager to buy in to companies like LinkedIn (whose executives recently opened the New York Stock Exchange), raising fears of a new dot-com bubble.

Marketers worldwide will spend nearly $6 billion advertising on social-networking sites this year, up 72 percent from 2010, the business information service eMarketer predicts. Facebook alone is expected to account for over $4 billion of that, more than doubling last year’s revenues and helping to boost global ad revenues for social networks to nearly 9 percent of online ad sales.

Still, Facebook will face increasing competition for social-network ad dollars. The business-oriented LinkedIn has more than 100 million users, and Twitter has 200 million (though it’s not publicly known just how many people use either site regularly). And heavyweights in related industries are taking an interest: Google CEO Larry Page, stung by the company’s failures in social media, has reshuffled senior management to make infusing social connections into search and other services a top priority. Apple has launched Ping, a social network tied to the iTunes music store.

Competition remains wide open in several international markets. Mixi, Gree, and Mobage-town are battling for dominance in Japan, Cyworld and me2DAY are popular in South Korea, and Vkontakte.ru leads in Russia. China, where access to Facebook is currently blocked, has entrenched local networks such as Renren, which boasts 31 million users and raised $743 million in its U.S. initial stock offering on May 4.

Of concern to all social networks is slowing growth in the user base. After a 19 percent jump in the number of U.S. users last year, eMarketer predicts just 4 percent growth in 2013. So it will be crucial to reap more advertising and e-commerce dollars per user through targeted campaigns (see “You Are the Ad,” May/June 2011).

Social networks are also working to expand their revenue streams beyond advertising. LinkedIn and Ning charge subscription fees for various services. Facebook, through its Credits payment system, takes a 30 percent commission on sales of everything from movie rentals to virtual goods purchased in Facebook-based applications such as Zynga’s FarmVille game. Web services like Groupon and Living Social (and now Facebook) offer users coupons from local businesses, taking a cut of any business that gets drummed up. 

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