Is there really an advertising model for social networks?

One of my consumer internet predictions for 2007 was that social network widgets would find a business model. There are a number of conferences coming up over the next few weeks that will address this, including Graphing Social Patterns, Widget Summit and SNAP Summit. In my opinion, it looks like the business model will be advertising, and that it will be rolled up into the broader category of social network advertising.

Of course, not everyone is as bullish on the advertising business model for social networks. As the NY Times noted:

Andrew Chen, an advertising executive and adviser to the Silicon Valley investment firm Mohr Davidow Ventures, suggests that the Facebook enthusiasm is overblown. Precisely because Facebook is such an appealing and engaging environment, he says, Facebook users click on ads significantly less frequently than elsewhere on the Web. And Facebook members who add applications to their pages can just as easily remove or ignore them.

“It’s really hard to value these things right now except on a very arbitrary basis,” he said. “The ecosystem has to mature significantly before any sort of real revenue or value can be created.”

Andrew is a smart guy, and based on current data, he is right. But as I’ve noted before, new forms of advertising take a while to develop, and until a standard emerges, they do not scale up quickly. Today, Google is 40% of all online advertising. It’s worth remembering that Google was founded in 1998 but didn’t switch to its CPC Adwords model until 2002. Overture was founded even earlier, in 1997. So too, judging the opportunity in social network advertising based on the first 18 months is likely to vastly underestimate the market.

To understand if there is an advertising model for social networks and their widgets, you have to ask two questions:

1. Is this a mass market medium?
2. Is there value to an advertiser in having a user willingly affiliate herself* with their brand?

* e.g. Friending Scion in Myspace, or joining an “I love my ipod” group on Facebook, or skinning their personal photo slideshow with a Casino Royale theme on Rockyou.

The answer to these questions is clearly “Yes”. Based on that, I’m confident that we’ll see a large new form of advertising emerge over the next few years. Exactly when that occurs will largely depend on how quickly the big advertisers and the big social networks and widget companies can arrive at a standard for what form this social network advertising will take.

I’ll be moderating a panel on Monday at 2:45pm at the Graphing Social Patterns conference that will explore this question in more detail within the Facebook context: Facebook Ad Networks & Paid Distribution.