Aug 30, 2007 6:02 AM, PROMO Xtra, By Brian Quinton

The growing popularity of social networks such as Facebook and MySpace makes the sites attractive targets for online ad spending, but a new report from research firm IDC finds that the networks face some serious hurdles in monetizing their success with ads.

The report, “Social Networking Services in the U.S.: Popular, Yes, but How to Monetize Them?” finds that the attention social networks are getting from advertisers currently falls well below their prominence in the media or their popularity with users. The networks earned only about $400 million in revenue in 2006, almost all of it from advertising. That figure could grow to $1 billion this year.

But in the future, IDC said, social networks may have to rely on a mix of subscriptions, ads and e-commerce revenues to turn a profit. And while only the ad-supported business model will scale well enough to make social networks interesting to large brands, they may never be able to offer the “brand-safe” atmosphere that will attract ad dollars in proportion to their audience growth.

“Social networks cannot guarantee a brand-safe environment,” said Karsten Weide, program director for IDC’s digital marketplace and new media research and one of the authors of the report. “Advertisers do not want to see their ads displayed alongside illicit content, for example.”

At the same time, the networks can’t afford to impose too many restrictions on what their users publish on their member pages.

“The dilemma for social networks is that if they start to control what content users can post, they will lose the popularity that attracted advertisers in the first place,” Weide said.

Other evidence suggests that social networks face challenges in their effort to become attractive marketing channels. Earlier this month, six companies, including Vodafone and Virgin Media, withdrew their display ads from Facebook temporarily after finding that a blind ad purchase had placed their messages on a page devoted to the anti-immigrant, anti-Semitic, right-wing British Nationalist Party.

In response, Facebook said it has introduced a “small, easy fix” that lets advertisers opt out of placement on pages devoted to groups rather than individuals. The company also said no U.S. advertisers had raised objections to any ad placements.

Facebook is reportedly working on a platform that will target ads based on the personal data that users provide when they sign up. A Wall Street Journal report last week said the new ads would be interspersed in the “news feeds” that users get about their friends’ Facebook activities, rather than appearing at the top or on the sides of pages.

The new ad-format initiative might be important for Facebook because advertisers report that social network users respond to display ads at a lower rate than visitors on other content Web sites.

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