Social networking: Valuations vs. reality: Sites now face problem of converting users into revenues

AOL L.L.C. last week became the latest Internet player to bet big on social networking, agreeing to plunk down a whopping $850 million for Bebo.com. But turning Bebo’s impressive online and mobile traffic into dollars could be a challenge.
While MySpace and Facebook have drawn headlines, Bebo has quietly gained impressive traction, claiming more than 40 million users worldwide. And the company has built a notable following in mobile, ranking fourth among social networking sites in the United Kingdom with nearly 350,000 wireless users, according to M:Metrics.
AOL’s buyout may not have turned many heads given the kind of cash floating around in the social networking waters lately. News Corp. started the action in 2005, acquiring Intermix Media (which owned 53% of MySpace as well as other sites) for $580 million in cash, and Microsoft Corp. last year spent $240 million for a mere 1.6% stake in Facebook in a deal that valued the site at an unreal $15 billion.
But while some of the cyber communities have scored blockbuster deals from big-spending suitors, it’s unclear just how successfully they’ve cashed in on their audiences. Indeed, Google Inc., a master of online advertising, is discovering just how challenging the space is. The company will pay at least $900 million to MySpace through 2010 under the terms of an advertising tie-up, but Google in January surprised onlookers when its CFO George Reyes conceded MySpace, Orkut and other sites were “not monetizing as well as we would like.”
Industry onlookers were quick to pounce on what might have been an early indicator for the market as a whole.
“This has huge nasty implications for social networking sites,” Eric Savitz posted on Barron’s blog, “which I suspect you will be hearing a lot about in the days ahead.”
A Parks Associates study from October confirms the delicate balance such sites must strike, indicating 72% of social networking users would object to a monthly fee of just $2, and 40% would stop using a site if it contained “too many” advertisements.
And the online challenges — namely, ad-wary audiences and a glut of inventory — are likely to be exacerbated as social networking continues to expand into mobile. Wireless publishers are already up to their ears in unsold inventory, and consumers are less accepting of ads on their phones than on computers — especially if, like Facebook’s Beacon, those pitches seem a little too targeted.
Drawing traffic to mobile social networking destinations is difficult enough, considering the vast number of players on the field. Converting those users into cash may be more challenging than anyone realized.