What’s pretty clear is that in the UK there are two online players and many also rans . And only one of the players – Google – is a search engine.

So maybe Fred Wilson is right and we are going to see ‘social traffic’ on the web become the dominant force online in the near future. Arguably that point is getting very close with Facebook having a significant lead already in terms of time spent online (that’s shown by the size of the bubble in the chart).

I believe this trend has got some very important ramifications for the way money is made on the web today and specifically for online advertising models.

Text-based PPC advertising is a fantastic way to monetise traffic flowing through search engines.   However, that model does not in itself translate well into social sites where the focus is not search, but engagement/interaction/sharing/promotion.   In other words, if the power of text-based PPC is in its relevance to the search term, then it struggles in a medium where it needs to be relevant to the specific context of the exchange taking place in the social networking site.

Facebook’s performance ad platform seems to offer very granular targeting based on demographic data and interest profiling.  But the challenge is to make the ‘social ad’ relevant to the exchange taking place for people who aren’t buying, or even interested in buying anything, at that point in time.

The dilemma for advertisers is set to get even more complex with the continued growth of micro-blogging/real-time search on Twitter and Friendfeed etc.  Conventional online advertising models don’t stand a chance to deliver value in an environment which is constantly updating and in flux.

The good news is that online ‘audiences’ are still growing and where there is an audience there has to be a way to advertise to it! But advertising vehicles are going to have to change dramatically to exploit social.  The answer will be in becoming a participant in the conversation with a potential customer and making your advert a relationship builder rather than the mechanism to convert the customer directly to a sale.

Ironically, with old-style display advertising continuing to falter and spend often justified on the dubious basis of ‘brand building and awareness’, new social advertising models are likely to become a new form of ‘above the line’ marketing that is as much about establishing reputation and influence as it is about making sales.

What’s happening to the directories business is a classic example of the impact of digital disruption. I’ll drill down into why I believe this is the case in another post. But for now it’s worth considering that Yell was seen as a recession-proof stock because the classifieds directories business was “more resilient to economic downturns than other forms of advertising” according to its 2003 flotation. Well, that was true in previous recessions, but not now. And the reason why this one is different is that the Internet happened in the intervening period!

With that in mind, I’d like to plant this rogue line of reasoning. According to Nielsen Netratings about 70% of online local search is done through search engines and Google is the launch pad for most searches for local business on the Web. Now the Mozilla Corporation made c.$67M USD in revenues in 2006 (the latest numbers I could find) with 85% of this revenue coming from Google. In comparison yell.com’s 07/08 revenues were c. £140M GBP (c.$277M USD). I question whether yell.com can sustain its current growth as Google is becoming ever more dominant in search and is now going after the SME advertising market. And we do know that Firefox usage is growing year on year, so it’s revenues from Google are likely to increase too.

Against this background, is it just conceivable that the Mozilla Corp. could, in the near future, end up making more money from online local search than Yell.com? Yikes!

The full report and presentation is worth a close read and a handful of key messages jumped out at me.

1. Big business understands that social media is only going to grow in importance with 56% of respondents (rising to 80% in the US) seeing it as very significant for their companies within the next 5 years.

2. But, today the marketing organisations of major corporates are not at ease with social media. They see it as a source of customer insight (68% said they read and analysed social media to understand customer perception), and as a new channel for marketing/advertising campaigns, esp. viral (62% of respondents agreed). In short, big business is passively consuming social media or trying to map a fairly traditional campaign model to the medium. What it’s not doing is actually taking part in the community on the same terms as its customers.

3. There is a strong feeling that marketing agencies don’t get it. A typical quote from a respondent (this one from Johnson & Johnson): “They are not doing a very good job at all. At the moment most agencies still view social media tools as just another vehicle for driving their messages.”

Whilst TNS sees this as a reflection of the immaturity of the market and the need for agencies to acquire the skills to assist their clients exploit social media, I see a more fundamental problem. If social media is about having an authentic and unmediated connection with the community with direct lines of communication between the company and its customers, then this ‘conversation’ simply cannot be outsourced to an external agency. Rather marketing, sales and service departments have got to undertake this role themselves.

So all in all, a pretty clear picture that the big brands have got a long way to go to make ‘social marketing’ part of their business as usual.

Bebo has crafted a monetisation strategy based on wrapping advertising around third party content. Founder Michael Birch explained:

“What we’re trying to do here is simplify the whole relationship between media companies and distribution platforms. There’s value for Bebo and our users by having great quality, legal content on Bebo. And there is clear value to the content owner in both controlling the content and advertising, and in keeping the subsequent revenue.”

In other words, good for Bebo as it gets more content on its site, good for content providers as its gives them distribution for both content and adverts to Bebo’s 40 million members. Just last week ITV announced that it will make programming from ITV 2 available on Bebo – the first time ITV has made full length content available on a third party network.

So it strikes me that if Time Warner uses this acquisition to distribute engaging content to the Bebo community and then make this content its platform for online advertising it will be in a strong position to turn a Shilling from the deal.

But if AOL just looks at Bebo’s enormous user base and then thinks it can pump ads into the community without a relevant context or engagement it will be sorely disappointed with the results as shown by Google.

The big question then is whether Time Warner’s content house can work with AOL to make the deal work – that’s likely to be the bigger challenge to this deal succeeding.

It feels inevitable that there is going to be a backlash against the advertising-based business model of social networking. But if we accept that social networking as a medium (rather than any particular instances of it) is not going away and will continue to grow, it then becomes incumbent on online marketers to find better ways to engage the social graph. A new tool set is needed as the current tools are lacking …

For example Facebook promises that by using its ads you can “reach the exact audience you want with relevant targeted ads”. I would be really interested to hear people’s stories about whether these ads have been successful or not for them. My hunch is that simply having a well-targeted ad based on granular demographic data will not help conversion if it is blind to the social context it is served in.

The way to get that context is through participation in the conversations that your ‘audience’ is having. In other words join the party. The party metaphor is a great one for a community and quite insightful for online marketers. In the off-line world sponsorship and product placement work well as promotional tools at social events. Social networks offer plenty of opportunities to create branded/sponsored spaces for online conversations. And companies such as Blendtec (intentionally) and Coca-Cola and the Perfetti Van Melle Corporation – the maker of Mentos mints (unintentionally) have demonstrated the uplift in brand visibility and sales that comes when your product is at the heart of the online conversation.

So the message for online marketers is clear … as far as making money from social networking goes, the party is far from over … in fact it is just about to begin. Cocktails anyone?

This must be extremely frustrating for Google:

1. it is the leading platform for online advertising by a long, long shot

2. there is a massive, hyper engaged online audience in the leading social networking sites, that are amongst the biggest properties on the Net.

It seems almost inconceivable that online advertisers are not raking it in. But then again, what if the social networking audience is just not receptive to the traditional click through ad model? After all, for Myspace, Facebook and Bebo usage is about participation within the community and engaging with people you know or want to know. Why then click on ad to be taken off site?

Google seems to have realised that to monetise social networking sites it needs to do more than just put Adsense on Myspace. And more sophisticated targeting should bring better conversion. But taken too far and made too invasive as in Facebook’s beacon and users will rebel threatening the very usage that makes advertising attractive in the first place.

What’s to be done? Is this an intractable problem that will mean social networks even as they continue to grow will stay tantalisingly just outside the reach of online advertisers? If so, how can social networks be monetised?

To answer that question, we really need to think about where the value is in a social network. For me that value is in the connection between people and the exchanges they have in a community – in other words its participation that creates value in a network.

If we accept that, then businesses should be looking not to advertise, but to actively participate in a social network with the objective of engaging customers and creating advocates who will champion them to extended networks. This is what social commerce is all about and its a long way from the mantras of CPM and CPC that dominate the online marketing business today – isn’t it time we moved on?