Ben Ayers

One of Europe’s top VCs has urged big media European media companies to buy social networks, say Reuters.

In an article that was shocking for the single reason that it was deemed newsworthy by Reuters, it’s been revealed that Index Ventures’ Saul Klein told the Reuters (geddit?) Technology, Media and Telecoms gig that ”new audiences are not in newspapers or on TV or radio. They’re online and on mobile and in social media companies.”

The backer of many a Web 2.0 startup urged European firms to start competing with U.S. groups for deals that would combine their ad sales forces with the huge audiences on social networks.

“There are social media networks that have come from nowhere in the last three to four years that have built enormous audiences…but without a sales force you’re just not going to generate significant revenues and explain to advertisers what the opportunities are,” he said.

Klein’s plea was hardly a news story (it’s no secret that European startups don’t set the world alight for lots of reasons), but aside from the whys and wherefores of Reuters running such a piece of puff, there’s an interesting question here about the value of soc nets, or indeed any Web 2.0 ‘businesses’, to European media companies. 

ITV’s 2005 acquisition of Friends Reunited certainly divides opinion. Bearing in mind that it was the biggest soc net in the UK and that more global soc nets like MySpace were bubbling up nicely, it seemed like a sensible - and bold - move. Aside from the debate about what happened to the site in those interim years between acquisition and now, we are assured that the site makes money and hopefully, thanks to a recent relaunch, will continue to attract new members and give ITV (and its sales force) a better understanding of web users within its ‘family’ of users. (Disclosure: I work for ITV).

In the Reuters article Klein is quoted as saying: ”If you look at the top 10 Web sites in every country across the world today compared to five years ago, there will be one that you had never previously heard of. It’s not like people go to these sites once a month, they go back day after day and they spend a lot of time on them. That time is eating into print, TV and radio and so if you’re in one of those sectors and you want a business still in five years time you have to invest online.” 

He’s right that new sites are getting attention. But I am not sure that drinking gallons of Kool Aid and getting out the checkbook in a drunken stupour is the way to go. 

The excellent e-Consultancy makes this point well in this article:

“The truth is that not all advertising inventory is created equal and despite their impressive audiences and usage metrics, popular social networks are still on the bottom of the totem pole - for good reason. For many, they haven’t delivered ROI and for logical reasons, they may never be able to do so.

Of course, VCs like Saul Klein can ignore the facts when advising media companies to spend big money buying social networks because they’re in the business of making fools out of such companies.

It’s easy to tell media executives that they have the expertise to sell advertising but just need more inventory while pitching them on the idea that buying less-than-saleable inventory is a good business move - even when it isn’t.”

The fact is that while the social functions of even the stellar networks are as desirable as they are sticky, they’ve hardly proved they can deliver a significant return on investment at today’s asking prices.

I would argue that major European media companies are better off investing in their own sites and exploring technology that allows them to monetise what they have got. If investments are to be made as Saul suggests, they should be in smaller technology and advertising firms that mix well with their business.

And if big money is to be shelled out, the fit and value should be good. For example, a broadcaster could maybe do well to consider investing in some of the great video blogging platforms cropping up or perhaps even mobile video technology that they can integrate with their own sites.

The recent use of Seesmic to promote the Indiania Jones movie is a great example of how a simple concept can increase engagement between viewers and content. The ad revenue potential isn’t bad either, with the option of running short form ads at the beginning of every video. However, I’d very much doubt whether Seesmic is for sale. I couldn’t imagine Loic parting with his baby just as it begins to take off - and just as he’s hit on the real money spinner in video comments. And besides, even an emerging social web hit like Seesmic doesn’t look clearly monetised in terms of ad revenue.

As for the major soc nets, there’s nothing wrong with hopping into bed with them occasionally for partnerships and mutually beneficial initiatives. Indeed, companies can and should piggyback on the the big guys for some great wins. 

But the heady days of shelling out millions with no clear path to profit should be well and truly over. After all, everyone keeps on saying how the web is the most easily measureable form of advertising. Until those figures start to stack up for the big social nets, no matter how much Saul Klein says ‘come on in, the water’s lovely’ companies are wise to consider spending their money on more sensible and profitable opportunities.