Piper Jaffray on Social Network Advertising

Piper Jaffray’s latest edition of its Internet Strategist research note (out today; not available online) contains strong optimism for the future of online advertising. Among the predictions from Piper analyst Aaron Kessler: 20% growth in the online advertising market (vs. single digits in the rest of the ad biz), strong growth for ad networks and more consolidation in online ad services.

In the social networking realm, Piper projects that sites such as MySpace and Facebook will continue to suck time and pageviews from other sites, but that ad CPMs for SN sites and user-gen sites in general will remain low due to huge inventory (i.e., untargeted remnant banner ads), consumers’ lack of interest in the ads and advertisers’ concerns about the content.

One bright note for social networking, Kessler believes, is the ad targeting plans that the two major sites are working on. MySpace’s HyperTargeting has shown CPM lifts of 50%.

Kessler left out a key piece of the SN revenue puzzle: search. Already, search accounts for 30% of MySpace’s revenue, according to a presentation that Fox Interactive Media’s Michael Barrett gave at last month’s UBS media conference.

Another revenue driver for 2008 and beyond is the local/small business market. Both MySpace and Facebook recently launched self-serve ad systems, enabling any business to create a campaign (on Facebook, businesses can design a page for free, while MySpace still charges for anything but the basic no-frills page). Local online advertising is a growing business and social networks may be poised to bring in a sizeable portion of that revenue.