Cashing in on the data you create
— Eric Auchard is a Reuters columnist. The opinions expressed are his own. —
By Eric Auchard
SAN FRANCISCO, Sept 17 (Reuters) – You created it. They make money off it.
That’s the business strategy of popular Web sites, led by Facebook, which is just beginning to tap the value of its 300 million members, triple its base a year ago.
The paradox of so-called “user-generated content” is that big companies such as Facebook and Twitter look to grow rich on information users share with one another.
But some users are beginning to grow savvy to — and protective of — the value of the data they share about themselves. This has prompted Web players to make democratic noises about users owning their own information.
The companies face a dilemma: they must find ways to sell advertising to support the cost of hosting their customers’ creative content without scaring off the users who make it all possible.
Last week, Twitter, the Web-based short-messaging phenomenon, revised its terms of service to reassure members that they retain the rights to any messages they post on the site. The key change Twitter made is that now it has laid the groundwork to sell relevant advertising based on users’ messages, known as “tweets.”
Such moves are putting the legal conditions in place to offer targeted advertising based on user behaviors and intentions as they can be deduced from the content they create or watch. Individual activities can be used by advertisers to identify potential audiences, which in aggregate, are served up specific marketing advertising.
But it’s hard to see how existing forms of online advertising can be crammed alongside the rapid fire bursts of 140-character messages that Twitter users produce. Advertising experts say the company’s best hope lies in making corporate marketers pay to deliver marketing messages over Twitter. Some recent rule changes seem designed to enable such ads.
Facebook got into hot water with its members earlier this year for adding two sentences to its terms of service that asserted ownership of messages, photos and other user content.
It has also struggled to figure out how to target messages to its fast-growing audience beyond serving up simple banner ads based on a user’s location and other basic demographic factors.
“Facebook really doesn’t have advertising figured out at all,” Forrester Research advertising analyst Emily Riley says. “Their philosophy is to serve up fewer ads and not bombard users with flashy display advertising. Unfortunately they have to invent a new form of advertising to do that.”
Google this week gave the issue of user data ownership a twist by making it easier for users to import data in and out of Google products. The Internet search leader is promising to help users extract data out of or into 23 popular Google services.
It says it is about two-thirds of the way through analyzing its product portfolio to accomplish this result (More details can be found at DataLiberation.org).
The data ownership issue for Google is not about new advertising ambitions so much as about reassuring regulators and easing user privacy concerns. The company says making it easier for less technically inclined users to switch to sites offering similar services shows its openness to competition.
Nevertheless, it appears Google’s move to liberate data is also a bid to win customers from rival sites by making it easier to transfer everything from bookmarks to emails to videos back to Google. Of course, for this to happen, rival sites must give customers more control over data they post to those sites.
Another problem is that the value of advertising sold alongside all this grassroots creative activity remains minuscule. Despite high-profile experiments by many advertisers, most remain nervous running marketing messages alongside content they cannot control in some fashion.
EMarketer, a research firm, estimates U.S. online advertising sold along all types of user generated content will reach between $615 million and $870 million by 2013. That’s a tiny fraction of the total U.S. online advertising budget of $24.5 billion predicted by eMarketer this year, which it expects to grow to $33.7 billion by 2012.
So while Facebook boasted this week that it is turning a profit on its business as a whole, the company’s revenues will have to grow very rapidly to justify the heady valuation put on it by investors of between $6.5 billion and $10 billion.
Twitter, which TechCrunch reports is closing a round of fundraising that values it around $1 billion, faces a similar challenge. Data-sharing trends may promise to stoke the amount of Internet user activity, but the question of how to make advertising pay the bills remains unanswered.
— At the time of publication Eric Auchard did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund —
Read some of Eric’s previous columns here.
(Images: Twitter TOS screenshot; a user’s Facebook photos page; DataLiberation.org)