How Google Has Screwed Up the MySpace Deal

Lots of smart people are trying to figure out how to monetize socialnetworks. It's no easy feat: Even if millions of people log on toFacebook twice a day, they aren't there to buy sneakers, they're thereto connect with friends.

"I don't think wehave the killer, best way to advertise and monetize the social networksyet," said Google co-founder Sergey Brin, on a conference call inJanuary. "Some of the things we worked on in fourth-quarter didn'treally pan out and there were some disappointments there."

Brinought to know. Google has an agreement with MySpace, which has proven mostly disappointing. Under the deal, Google will serve ads on MySpace through the second quarter 2010. In return for the privilege, it will cumulatively pay the social network $900 million as part of a revenue-share agreement. Here's the problem: If Google doesn't make enough money over MySpace to meet the minimum revenue-share requirements, it has dig deep and make those payments, anyway. And thus far, the deal has shaved roughly 1.5 percent off the company's gross margins, according to estimates from Bernstein Research analyst Jeffrey Lindsay.

So if Google can't make a buck off social networks, who can?

AndyMonfried thinks he can help publishers do it. Monfried, a formerAdvertising.com executive and current CEO and founder of Lotame, sayshe's discovered the secret sauce for monetizing social networks -- andhe says Google's going about it all wrong.

"Youcan't put up contextual ads against user-generated content," Monfriedsays. "It's irrelevant, and advertisers don't want to risk their brandson user-generated content."

Lotame doesn't work with the big social networks (MySpace, Friendsteror Facebook), but it has partnered with 16 smaller social networks, from whichit has aggregated data on 30 million users. Monfried says Lotamedramatically improves targeting for advertisers by doing things such as identifying the "influencers."

Monfriedwas reluctant to disclose too many details on how Lotame's solutionvaries from Google's ad-targeting platform, but says his company isfocused on "verbs and actions." So instead of serving ads based on the text in users' profiles, Lotame focuses onusers' actions and demographic data -- such as when a 28-year-oldwoman in Southern California downloads a video on a social network.

"Googledoes a great job of monetizing intent," says Ray Valdes, an analyst atGartner Research. "It knows what I'm searching for and it can show merelevant ads. But social networks are not about intent."

Valdes argues that its unfair to slam Google's approach-- after all, the company's core business is search, not social media. And to be fair, Google said on yesterday's earnings conference call thatthey're trying new things -- including demographic targeting -- and that they've seen some progress.

Photo: Flickr/Kyle Jones