January 3, 2005, 12:00 AM

Where everyone becomes an advertiser

Buy.com has made a bet on the future of social networking as a marketing tool. Other retailers are paying close attention.

With e-mail marketing challenged by spam, search marketing competitive and pricey, and online retailers striving to stand out in a competitive market, a new marketing and selling arena is emerging through social networking. Its formula seems made for the times: With consumers inundated with advertising messages in pop-ups and e-mail, not to mention being bombarded offline, and a generation of young adults and youth brought up on Internet communications, social networks-web sites where people find others with similar interests in activities and consumer products-are attracting attention for their potential as centers of consumer-driven marketing and merchandising-no traditional advertisers or merchandisers allowed.

“The effect of like-minded consumers sharing product information and being able to act on that information and purchase their friend’s recommendations in one destination is explosive,” says Neel Grover, president of Buy.com, which sees social networking as a springboard to the future of retail e-commerce. To claim a stakehold in the new market, Buy.com last fall acquired in a cash-and-stock deal the social networking site Metails.com and has since renamed it Yub.com. Yub, which stands for “young urban buyers” and is, of course, Buy spelled backwards, operates with Buy’s patent-pending method of referring e-commerce sales through hyperlinked words in members’ profiles.

The next big thing

Instead of responding to marketing pitches by retailers, consumer goods manufacturers and other commercial advertisers, consumers- especially today’s under-30 crowd-will flock more to their peers in social networks for recommendations on what to buy, Grover says. “Instead of buying what online stores tell you to buy and then becoming a consumer, Yub flips it, and allows you to hear what friends and consumers say before you buy,” Yub declares on its site.

If Yub works as well as Grover and Buy.com chairman Scott Blum expect, it would become the next big thing in retail, leveraging social networking to the point where Yub had the commerce clout to rival the largest of more conventional retail sites. “Social networking will become a huge force to reckon with,” Blum says.

Grover and Blum are not alone with their expectations of substantial growth in social networking e-commerce. Although still in its infancy, with a limited number of opportunities to purchase something online through a peer’s referral, social networking has surfaced in the minds of many retailers and industry experts as something to consider.

“Social networking is the next wave of the Internet,” asserts Reed Hastings, founder and CEO of Netflix Inc., the online DVD rental service, which expects to boost its number of subscribers with a social networking feature it launched within Netflix.com in late November.

While consumer acceptance remains the great unknown of e-commerce in social networking, analysts are enthusiastic about the marketing approach’s prospects. “E-commerce in social networking is very viable,” says Charlene Li, analyst with Forrester Research Inc. “It’s something that will stick around, especially with younger adults.”

Social auction

Other social networking sites include Friendster.com, which claims 13 million members and sells commercial advertising space, though unlike Yub.com, it doesn’t offer links from member content to product buy pages. Various forms of social networking are also beginning to appear in established commercial sites. While eBay’s system of letting buyers and sellers rate each other has for years served as a form of social networking, Overstock.com launched an auction site last September with personalized pages where customers can post photos and other content.

When Overstock customers bid on an auction, they can trade notes with other customers on a seller’s reputation or see if a seller is a friend of a friend. “It fosters trust and enhances the sense of community,” says Holly MacDonald-Korth, vice president of auctions. “If you know someone, it’s easier to transact with them.”

Every time an Overstock auction user completes a transaction, his or her list of contacts expands, creating a viral marketing effect, because each new contact can have his or her own lists of friends and business contacts. “As these social networks grow, our auction activity will grow too,” MacDonald-Korth says.

Netflix, the pioneer in online DVD rentals, is also getting into social networking as a way to build on its base of more than 2 million subscribers and fend off mounting competition from Wal-Mart Stores Inc.’s Walmart.com, Blockbuster Entertainment Inc. and others, including an expected entrance into the market by Amazon.com Inc., Hastings says. Although Netflix has long posted film reviews written by customers, in November it launched a social networking system, called “Friends,” that organizes reviews and other personal information related to individual subscribers, allowing other subscribers to choose movie reviews and recommendations from people with common interests, he says.

15% growth-a day

“The response has been extraordinary,” Hastings says. “We started with a couple hundred Friends users, and it’s been growing as much as 15% per day. As subscribers start using Friends and invite others into their personal network, including some who are already Friends members and some who aren’t, more people are becoming Netflix subscribers.”

Social networking’s appeal extends to merchants of all sizes. “It’s something I’ll probably want to look into,” says Ron Henderson, CEO and co-owner of Auntie’s Beads Inc., a Grapevine, Texas-based web and store retailer of beads and other materials to people who like to make their own jewelry.

Because social networking sites let participants search for people as well as products according to particular interests, it could serve as an important tool for niche retailers like Auntie’s Beads or outdoor sports gear merchant Altrec.com that cater to groups of consumers who share a passion for a particular kind of product or activity. “There’s a growing buzz about social networking,” says Greg Toledo, manager of business development at Altrec, which is already planning to build the beginnings of a quasi social network on its site by adding customer-submitted content that could include recommended products that link to Altrec buy pages.

But just how far social networking will take off combined with e-commerce sales is yet to be proven, placing uncertainty over Grover’s and Blum’s expectations for Yub.com. If nothing else, Yub’s social networking-driven e-commerce may need to wait for more 20-something consumers to populate its pages.

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