The latest in our end of year 2008 review/2009 preview, today we look at social media.

Yes, social media has changed publishing, but no, social media - and social networking in particular - will not change advertising all that much.  What it has done, without a doubt, is make marketing much much more challenging.

To realize why, you need not look ahead but think back.

Social networking has been around from practically day one and the 2.0 version of it simplt reiterated the hits and misses of the genre:

- Geocities came back as MySpace,
- Broadcast.com came back as YouTube,
- Classmates.com came back as Facebook, and so on.

But while all of these companies had successful exits, the hundreds of clones they hatched will suffer a less successful outcome.

Ultimately, we see social media play out in a handful ways:

1- Numerous companies raised a lot of money betting on User Generated Content (UGC), expecting the so-called wisdom of the crowds to change the rules of engagement in media. Indeed, social media (of which UGC is a subset) has changed the dynamics of publishing, but advertising will remain largely immune as marketers won’t come near it.  For the full post clik here.

In fact, the only real impact UGC shall have on advertising is depress advertising rates as an influx of ad inventory floods the marketplace.  However, a solid 5 years into the UGC “revolution”, it’s clear that advertisers are not impressed.

eMarketer just reduced the forecasts for social advertising: The company is projecting that by 2011, advertisers will spend $4.3B worldwide on social networks; it had previously guessed the number would be $4.7B. It also took down its US 2008 estimate to $1.4B from $1.8B. You won’t see that in any investor decks, I’ll tell you that.

And speaking of investors: they exasperated matters by flooding “Yet Another Social Network” (YASN).  With little proprietary technology and even less content to speak of, the barriers to entry were scant, and today, with revenue projections not being hit, the vast majority of social media companies are finishing 2008 with their back to the corner, and potentially being out of business by next year’s end.

2- Social media is ultimately just another form of communications, and like email, chat and message board communication, this will not be embraced by advertisers.  So while companies like Hotmail and ICQ sold for a tidy sum (we actually put both sales on our Top 10 Best Web M&A list), we don’t think it justifies the exorbitant sums of VC money raised for the space.  Why?  Because the VC space all baked in Google-esque revenue growth rates and by now it is clear that if social networking sites are to survive and succeed, they will need revenue streams other than advertising ones.  However, I do not think these would be considerable enough to please VCs, who let’s face it, have already realized the err of their ways and now laugh at UGC and social networking… as if they knew that it was a farce all along.

3 -Go Big, or Go Niche

In fact, it’s not all bad news: if you are #1 in your social networking niche (so for example Dogster.com), great, you need not do anything different.  But if your niche is really small and you are VC-backed, you might want to start looking for another job.  If you are #2 in your niche, that might work if you’re Facebook/MySpace, but if your niche really is a niche… then again, start looking for a job.

4- Over time, most if not all websites will embrace and integrate social media bells and whistles, but they will delineate these to protect advertisers.

Today, for example,

- practically all newspaper sites offer user comments,
- 60% offer some form of UGC,

However, news sites do this because it makes sense to do so, but they recognize that social media helps increase inventory and volume, without necessarily leading to revenue.  As such, they’ve learned to parse these sections out.  Think of how CNN has managed to introduce iReports without actually weaving these into their main stories.  Usually, these are restricted to their own section.

I’ve covered social media quite a bit on this blog:  First, the bearish posts:

- Connecting the Dots: Why Social Media Fails at Generating Revenue
- Why Social Media and Advertising = Fail
- Dark Cloud, Meet Social Media. Social Media, Meet Dark Cloud
- Social Media Hype Train Continues
- When Will Social Media Get It?
- Why Social Media and Beacon Are Doomed to Fail and What Facebook Should Do
- Social Media Growing Pains

Then, some of the more bullish ones:

- Facebook, or MySpace’s, Multi-Billion Dollar Business?
- Are Affiliate Sales the Path to Facebook’s Billions?
- Memo to Facebook Sales Team

Tomorrow, we look at VC activity in 2009.

• Digg this Blog
• Share on Facebook
• WatchMojo on Twitter
• WatchMojo on YouTube
• Add to Favorites
• WatchMojo Newsletter