Bronte Media

An interesting post on Fotolog’s deal with Google by Silicon Alley Insider (p.s. great blog) got me thinking: do the grand-sounding multi-hundred million revenue deals make financial sense?

The deals, signed mainly by Google, sometimes by Microsoft and almost never by Yahoo have large press-release numbers that journalists eat like candy, but are the social networking firms taking the online ad giants for a ride or vice versa?

Let’s dig more into the Facebook-Microsoft deal to see more. Peter Thiel, an investor in Facebook, estimates that about half of this year’s $150m will come from the Microsoft ad deal, or $75m. Since it’s July and halfway through the year, we can roughly break that down into a monthly number of $6.25m.

From the latest comScore numbers, which are traditionally very conservative, but less so as the numbers get bigger, we can see that Facebook did about 15 billion page views in June - or roughly 15m units of CPM.

Because the comScore numbers are conservative, I wont apply a discount to the page views to get at a number of available impressions Microsoft can show. Let’s just assume they cancel each other out.

That means that Microsoft has to earn more than 42 cents CPM to make money from the deal.

Basically, we can masturbate over Facebook being the future of advertising and being able to be infinitely targetable but the reality is, no one is targeting all that smartly today. Or at any other social networking site for that matter. And so the money changes hands at around 10 cents CPM when the ad networks come in.

Direct buyers of advertising also have done poorly in their initial campaigns - as much their fault as the audience Facebook has built.

So I don’t think Microsoft is making money on its deal in 2007 but its probably not losing that much either ($1-3m / mo) and has the option through 2009 to get the targeting and ads relevant.

The problem for GYM is that as soon as the targeting and ads do work, the guarantees go away but the share of the upside increasingly goes to MySpace/Friendster/Facebook/Fotolog.

The billions GYM are promising will only generate very small incremental profits for them. For Google that is OK but they are selling the advertisers on Google.com anyway but for Yahoo and Microsoft they will bog themselves down in AdCenter/Panama and hiring truckloads of sales people and diverting their attention away from what really matters to them as companies: their own sites’ usage. So I don’t think it makes sense for them to chase these deals even though they make headlines and infer that they are ’still relevant’ in a world of Google domination.