The Problem with Social “Networks”

The business plan behind virtually every social network launched in the past ten years is a pretty simple 2 step process:

1)      Get Users

2)      Make Money

In theory, this is a great strategy. Dusting off my Econ 101 textbook, there’s an entire section on Network Externalities which no doubt has inspired the current generation of entrepreneurs. Once you have a large network of users, you’re supposed to be impermeable to competitors that don’t.

This simple concept is especially popular in the software community, where, after an upfront expense of developing your software, you can add users to your heart’s content at virtually no cost. The strategy worked brilliantly for Bill Gates, who emphasized volume over profitability early on to build an (almost) impenetrable fortress of compatibility. It worked for Google, who won the search war by offering users a clean experience while its competitors crammed ads down their throats.

It stands to reason that it should work for social media, too. Right?

Except… it doesn’t.

Looking out at the social networking landscape, there’s little evidence of network externalities. In two years, Instagram and Pinterest, neither of which appear to have radically different functionality from Facebook, picked up a combined 50 million accounts, many of whom are presumably also Facebook users. Validating Instagram as a potential threat, Facebook bought the company for a shocking $1 billion last month.

On the flip side of the coin, there’s Myspace, the first Social Media website to reach 100 million users and a company once valued at $12 billion, now struggling to stay afloat as its user base erodes.

So what’s happening here? These are social NETWORKS aren’t they, so why aren’t the network externalities keeping up their end of the bargain?

In my estimation, there are a few reasons:

1)      It’s not an either-or question. My computer can only run one OS. That means, unless I’m really fed up with my current solution, there’s no opportunity for me to try out competing products. With social networks, on the other hand, I can set up a Pinterest account for free in a few clicks without giving up my Facebook account. That takes away a lot of the friction that helped Microsoft maintain their empire once they’d acquired market share.

2)      It’s really easy to learn. It’s taken me years to master MS Excel, so the last thing I want to do is learn a new program, even if it’s functionally superior and free to try. Instagram is a relatively simple concept and it’s known for its ease of use, so I’m not intimidated by the learning curve.

3)      We have more time to consume it. With the rise of smart phones, we’re spending much more time on the internet, and Social Media is perfectly suited to be consumed in small increments while I’m waiting for a bus. This means I have more of the one currency that it does cost to try out a new social website: time.

4)      New products aren’t trying to make money off of me… yet. Like Facebook circa 2007, the up-and-coming social websites are solely focused on user growth, so they don’t weigh their product down with ads. There are plenty of Venture Capitalists ready and willing to fund their cash burn while they acquire eyeballs. That means that in addition to being completely free of risk, I can reasonably expect a new product to have a better user experience than the incumbent.  

Does that mean that Facebook will necessarily go the way of Myspace?

No. But unfortunately for them, they can’t count on having the competitive moat that Microsoft has enjoyed. To stay on top, they’ll actually have to serve their users better than the competition, which Microsoft has never really had to do during its 30 year reign of terror. It’s not going to be easy.

It seems to me that a lot of the furor over social media in recent years has been due to an over-appreciation of the network effect. Networks thrive on friction, and the modern-day consumer of internet media is increasingly friction-less. They’re open to trying new products, and not particularly loyal to old ones. If you’re planning on pursuing this strategy at your company, think hard about how difficult it actually is to try out or switch to a competitor, and don’t assume that network externalities will be your one way ticket to Profitability Town once you’ve done the hard work of customer acquisition.

Tagged in

social media social networks