I am just coming back from a meeting of the MIT Enterrprie Forum SIG on digital media.  The session was on consumers social network, and an interesting discussion took place concerning ad-based revenue models in this space. The question was asked: “If your companies are so successful then why is an ad-based revenue model the kiss of death for investors?”

1) Mass-Marketing is Dead (and the internet killed it).

Part of the answer is that ad-based revenue models have been given a black eye by general audience sites that do not form a focussed user community.  In other words “mass marketing is dead.”  If you are serving banner ads to a mass consumption site then you have a very low likelihood of serving anything useful to any particular user.  Combine that with the fact that people will “turn-off” your ads by simply ignoring them and your actual conversion rate will be very low.  That’s why $/impression is usually so low for these sites.

Google gets around this problem (and achieves relatively high ad-rates, by focussing the ads based on the search terms.  Social sites provide an answer to this problem by creating a focussed audience.  If the ads can be tailored to that audience then ad-rates can be 10 times higher (according to the panel).

2) Facebook (yes, facebook).

The facebook problem is a question of what Hangout.com’s President and CEO Pano Anthos calls the “modality” of the site.  Why are people there? For facebook people are there to catch up with freinds not to buy things. Because of this re banner ads on facebook have a notoriously low CPM. Pano’s gave a hilarious analogy to men’s room advertising.  ”I’m just not there to buy things at that moment.”  So the modality of your site is important as it relates to what kinds of ads will work.  An example was given from the mobile platform mocospace.  People are on the site to interact with their friends much like facebook in the mobile setting.  In this context the best form of advertising is not to advertise products, but rather to inform users about brands.  Forget click-through, you just want to inform, and support the site and the environment where the users are spending their time.  So their most effective ads are album releases, movies etc, where they’re not expecting people to actually make a purchase, but just to become aware of the brand.

3) What kind of ads are they anyway?

Finally, there was the great point raised about click-through and click-to-purchase advertising on the web.  The largest and most well understood form of brand advertising occurs on television.  This is not a click-through or click-to-purchase medium and it has done quite well with advertising and vice-versa.  The same is true of print media.  The ads inform you of something, and that is their purpose, not to get you to make a purchase while you’re watching or reading.  The web need be no different.  In other words, everything old is new again.

The name of the game is creating an audience that will be receptive to the information in the ad, presenting information that the audience won’t immediately ignore.  The rest is old-school.  Everything old is new again.