Social networks need to be useful to make money

By Anupreeta Das - Analysis

SAN FRANCISCO (Reuters) - Virtual beer and vampires may no longer be enough to keep members of social networks like Facebook and News Corp's (NWSa.N: Quote, Profile, Research) MySpace riveted to their computers.

Instead, the key to the future of these Web sites may lie in more practical functions, such as making plans, booking tickets or checking stock quotes.

"Right now, the big challenge for social networking services is finding a way to simultaneously encourage user loyalty and revenue growth," said analyst Ri Pierce-Grove of research firm Datamonitor.

Simply put, if people do more things on social networks, they stay online longer, share with friends and reveal more about their tastes and habits, allowing advertisers to better focus their messages. Advertisers usually pay sites based on the number of times an ad is clicked, and people are more likely to do that if the ad is specifically targeted to them.

Market research firm eMarketer predicts that U.S. advertising spending on social networks will exceed $1.6 billion this year as the sites and companies that make applications for them push to harvest more personal information posted online, then sell it to advertisers.

But the search for the best way to do so is still on.

Advertising on Google Inc's (GOOG.O: Quote, Profile, Research) social networks, including a partnership with MySpace, brought lower-than-expected revenue in the fourth quarter, company co-founder Sergey Brin said on a conference call in January.

"I don't think we have the killer best way to advertise and monetize social networks yet," he added.