In the space of barely a week, News Corp has sold its great white hope for internet profits (MySpace, for $US35 million), bought a niche advertising site directed at young parents (KidSpot for $A45 million). Meanwhile Google has announced a challenge to Facebook with Google+. What will this mean to Facebook? Probably not very much.
While MySpace was embarrassing the business was almost certainly doomed before News actually bought it, just nobody realised it. Way back in 2007, not long after Facebook had started its international expansion, this column noted, “while the mainstream media has well and truly caught onto to the success of the MySpace website, the leading social networking site is in danger of losing its crown, with Facebook, its prettier, more functional competitor rapidly gaining market share”.
The problem MySpace always had was that it wasn’t a well-designed product. Even back in 2007, when MySpace had triple the number of visitors as Facebook, its dominance appeared tenuous. Facebook’s other advantage was its early exclusivity, giving membership an immediate value. Initially, Facebook was used only by Ivy League college students, before being opened to more students and eventually, in 2006, to everyone.
So the logical question arises, as posed by Stilgherrian in Crikey last Friday, if Facebook was able comprehensively destroy MySpace, will the same happen to Facebook? Especially against the might of Google.
The answer? Probably not.
Facebook, more than almost any other company, is a beneficiary of a global “network effect”. A network effect will occur when the effect on a user of a product or service is improved as more people use it. The telephone is a perfect example — the more people who have phones, the more benefit everyone gets (if only one person has a phone, it’s completely useless). As a social network, Facebook derives almost all its value from the fact that it is the social network.
In fact, most of the leading internet companies have cemented their positions due to network effects. Many of the best internet businesses are in effect, lists that have become dominant because people use them. Companies such as Seek, Realestate.com, Craig’s List or eBay are merely lists of products or services being offered for sale. (KidSpot, which NewsCorp bought last week for $45 million, is another example.) The companies are extraordinarily valuable because users trust that these lists are comprehensive. That encourages more people to advertise on the list, and the virtuous cycle continues. (Not all internet businesses survive on the network effect, with Google and Groupon being two fairly significant exceptions).
So why didn’t the network effect help MySpace? Largely because it never reached a satisfactory level of ubiquity. As noted in 2007, while Facebook was used by college kids, MySpace was “home for Latino and Hispanic teens, immigrant teens” as well as “other kids who didn’t play into the dominant high school popularity paradigm”. (Those users have less value to advertisers than say, someone looking for a mortgage on Google.) Plus, MySpace was clunky, poorly designed and provided minimal utility to users, especially when compared with Facebook. Many users of Facebook would never use MySpace, so it is arguable the two weren’t even direct competitors.
Because Facebook has achieved such a strong network effect, it will be exceptionally difficult for business, even a far more profitable company such as Google, to muscle in on Facebook’s market dominance. Most people, especially those under the age of 30, are already using Facebook. They would need a very significant incentive to stop using Facebook and start using Google+. Further, a new social network needs a large number of users initially, otherwise, it’s a bit like trying to hold a party in an empty room. Why would anyone stop using a social network that all their friends use, to start using a social network that none of their friends use?
But for all Facebook’s dominance, that is yet to transfer into significant profitability. Facebook’s key area for potential profit is Google’s own turf, targeted search. Currently, most of Facebook’s profits come from relatively untargeted banner/text advertisements. Unlike Google, which earns revenue from Adwords, that is, advertisements that are tailored to what users are actually searching for.
Figures released in January suggested that Facebook could earn about $US1 billion this year, compared with Google, which made $US8.5 billion last year and is the eighth most valuable company in America.
Of course, if Facebook are able to muscle into search, then Google has a real competitor on its hands. Which explains the attempt at Google+.
I think you are wrong on this one. Google+ has a lot of advantages over Facebook that make it likely to succeed.
1. Already has an potential audience through the millions of gmail and blogspot accounts.
2. Already is one of the first places people visit when they get online.
3. Powerful existing infrastructure platform that is geographically distributed.
4. I’m sure the migration tool to convert facebook profiles to google+ profiles already exists and is awaiting activation.
5. New functionality (the circles definitely beat the facebook privacy settings)
6. Social Media is not a zero sum game. If you build it, and its halfway decent, they will come. Most social media fans already have a twitter, facebook, foursquare account etc. Adding a google+ account is not going to be an issue.
It won’t smash Facebook, but it will grab at least 20% market share in no time at all.
I think Google+ has a chance – because it’s backward compatible with gmail. Everyone who uses gmail will instantly become a google+ user when it goes out of beta. This should give it critical mass to challenge FB. Furthermore, Google+’s interface is very slick, well thought and well designed, compared to FB’s aging interface. Put simply, it will be easier and more convenient to use Google+ than Facebook. Facebook as the incumbent is obviously still in the best position to continue dominating the social networking market, but Google+ should not be underestimated, and could give FB a real run for their money.
I think people under-rate the Achilles heel of Facebook (their laissez-faire attitude to privacy) to potential to drive people away. If enough people get sick of it, then G+ may do rather well…
The outcome is far from certain. The network effect is just another barrier to entry that market incumbants can take advantage of. People are generally sticky and over time become brand loyal. But are they really? Especially in a market with very few competitors.
Google are entering with an innovative product, just like any new entrant. The innovation needs to be strong enough and compelling enough to overcome the network effect. The network effect is possible a recent phenomenon but its not an “I WIN” button by any means. And its a fairly weak barrier considering that there’s a critical mass effect… where the innovation is strong enough to draw away enough people, the network effect is negated completely.
I have yet to see any journalist write a sensible article about this topic and I do not understand why. There are basic market principles at work here. There seems to be a tendency to think that facebook has won and that’s it. End of story. Where’s the impartiality? Where’s the assessment of each offering on its merits?