Over the past half-century, we have seen a dramatic evolution in computing and communications platforms. These have changed our lives first in the research lab and the corporate office, then in the home, and now everywhere. In the 1960s and 1970s, we saw the emergence of timesharing systems over mainframe computers and their private networks. In the 1980s, we saw the birth of networked personal computers and workstations as well as advances in home-use recording and playback devices for multimedia. In the 1990s, we had an explosion of activity on the Internet with the Web as a graphical user interface. In the 2000s, we have seen enormous activity—email, texting, Web searching, sharing of photos and digital music files, location-based services, and many other applications—on laptops and mobile devices, especially smartphones. And, increasingly over the past decade, but especially over the past several years, we have seen the emergence of social networking systems ranging from MySpace to Facebook, LinkedIn, Twitter, and Foursquare, as well as Groupon (which recently turned down a $6.5 billion purchase offer from Google).
Social media networks are, in different degrees, new kinds of platforms that facilitate communication and offer new systems for texting and sending email as well as sharing files. They enable computing through access to different applications and databases. What is less well understood is how these platforms compete for user attention and revenue with other computing and communications platforms, such as for personal computing (Microsoft Windows and the Apple Macintosh), general mobile communications (RIM Blackberry, Nokia Symbian, Google Android, Microsoft Windows, and others), traditional email (Microsoft Outlook and Google Gmail), Internet search (Google, Firefox, Microsoft Bing), and file sharing (Flickr, among others). There truly is a new war going on, with lots of players and no clear path to victory.
How to win or preserve territory requires the same kind of thinking we saw in previous platform battles. (See my January 2010 Communications column "The Evolution of Platform Thinking.") But, when it comes to social networking, we should keep two thoughts in mind. One is for all the would-be billionaires who are now trying to create their own social media empires. When we look at Facebook, or even Groupon, we are looking at the survivors of a competition that has already gone on for years, since the late 1990s. Like startup companies in other domains, most disappear completely or fall into obscurity. The world can absorb more social media networks, but how many? In addition, nearly all rely on advertising (including searches of their privately controlled or "walled" content) for revenue. Advertisers want to see volume and results. Because of the power of network effects and positive feedback, a relatively small number of sites will probably draw most of the user traffic and advertising dollars. So a large number of social networking businesses cannot survive with a traditional advertising business model, unless they are non-profit or no-profit.
Of greater concern from the business point of view is that advertisers on social media sites such as Facebook get poor responses—about one-fiftieth the click-through rates compared to what Google sees for its sponsored ads along with Internet searches.a It seems that people who want to purchase goods and services usually begin their search on Google or another search engine, and so ads that appear on the screen with search results are targeted and often highly relevant. Ads that appear on social media sites are also related to the content the user is seeing or creating, but these users seem much more interested in communicating with their friends or sharing information than making a purchase. Social network users may even see ads as more of a nuisance and an intrusion into their privacy, rather than as helpful leads to help them in shopping.
Groupon, founded in 2006 and the fastest company to go from zero to $1 billion in revenues, has a different business model, and this has made it unusually successful. The company solicits businesses such as restaurants, retail shops, or local services such as hair and nail salons to offer discounts, one a day in specific markets. The strategy, in effect, is to apply online social networking technology to the coupon business, with some special characteristics. The discounts take effect only if a certain number of people come to the store to purchase the good or the service. Groupon then takes a percentage of the revenue. So customers are encouraged to tell their friends about the deal, lest no one get any discount. Unfortunately for Groupon, the strategy is easy to copy. (LivingSocial and some 500 sites around the world also do this.) And too many customers can swamp a small unprepared vendor. Nonetheless, Groupon has a head start, a proven business model, and a lot of "mind share" that continues to attract and keep users and clients. But it still needs to build a defensible platform and a broad ecosystem to help maintain this leadership position.
The second thought I have expressed before: In a platform battle, the best platform, not the best product (or service), wins. We have seen this with VHS over Betamax, MS-DOS and Windows PCs over the Macintosh, the Intel x86 microprocessor over noncompatible chips, and even Mattel’s Barbie doll over newcomers such as the Bratz and Moxie Girlz families of dolls from MGA Entertainment. Accordingly, we know something about what it takes to win and whether a stalemate is likely to occur. The latter seems to be the case in video-game platforms with Sony (PlayStation), Microsoft (Xbox), and Nintendo (Wii). Google is also challenging the "open, but not open" or "closed, but not closed" strategies of nearly all computing and communications platforms, ranging from desktop and mobile operating systems to social networks and Internet TV and video.
Successful Platform Attributes
Some attributes of winning platforms relate to technology strategy—how open versus how closed the interfaces to the platform are for application developers or users who want to share or import information across different systems. Another factor is the degree of modularity and potential richness in the platform. Platform companies must make it relatively easy for outside firms or individuals to add functionality and content as well as to create compelling new products or services that utilize features of the platform. Another key attribute depends on the interaction of platform openness, modularity, feature richness, and strategic efforts to increase the size and vibrancy of the applications ecosystem. A strong ecosystem is usually essential to generate powerful "network effects" between the platform and the complementary products and services that geometrically increase the platform’s value to users as more complements (and more users) appear. The platform must also accommodate "sticky" content and user behaviors that make it possible to search and attract advertisers.
To win in a platform war, it helps if a platform generates strong network effects.
Let’s take Facebook as an example. Mark Zuckerberg, Time magazine’s 2010 Person of the Year, founded the company in 2004 with some friends while he was an undergraduate at Harvard University. At the end of 2010, Facebook had some 1,700 employees, probably $1 billion in annual revenues, and a market value of some $40 billion (of which Microsoft owns 1.6%).b It had more than 500,000 applications in its ecosystem. Most importantly, in December 2010 Facebook had around 600 million users—with 70% located outside the U.S. The aggregate number was up from 100 million in August 2008. This means Facebook has been acquiring new users at the rate of more than 200 million per year. It is not inconceivable that, in just a few more years, nearly everyone in the world with a personal computer and an Internet connection or a smartphone will have a Facebook account. How likely is this to happen? How much money is this likely to be worth to Facebook investors? We can examine aspects of these questions and see how the future might play out by using the Winner-Take-All-or-Most (WTAoM) framework.c
First, to win in a platform war, it helps if a platform generates strong network effects. Facebook has these, in spades. There are very strong "indirect" network effects in the sense that, the more your friends join the network, the more peer pressure there is on you to join. Some people (especially younger people but not only them) spend a good part of their day chatting and exchanging photos and video clips with their friends, and friends of their friends—on Facebook. The peer pressure and the system keeps you in the network and encourages you (by automating the suggestion process!) to bring more of your friends into the network. There are also very strong "direct" network effects in that applications built to run on the Facebook operating system and that access special features and database content within the platform only run within Facebook. The technical platform elements here consist of the Facebook Connect APIs and proprietary query and mark-up languages for applications developers. Google is challenging Facebook by promoting its own more "open" application development standards for social networking sites, the OpenSocial platform, and trying to bring other sites together in a coalition that puts pressure on Facebook to join and open up. Be that as it may for the moment, at present, Facebook is strong on this first measure of generating its own network effects.
Second, a winning platform must minimize the opportunities for competitors to fragment the market through exploiting differentiation strategies or segmentation niches. Here is where Facebook has a big challenge. There are thousands of social media sites that do different things and some are quite large in their user bases. They bring together people interested in art and music (MySpace), instant communications (Twitter), selling product and service discounts (Groupon, LivingSocial), locating their friends in real time (Foursquare), or connecting with other professionals (LinkedIn, Plaxo). These sites are based in the U.S.; other countries, such as China, Korea, Japan, India, and Brazil have some domestic-only social networking sites that are very large as well and quickly growing in popularity. It should be noted that Facebook is banned in several countries, including China, Iran, and Pakistan. So Face-book will never get 100% of the global market like Japan Victor did with VHS. It will not even get an Intel-like 85% of the market as long as there are specialized sites and geographic or political barriers to world domination.
Third, a winning platform must make it difficult or costly for users or ecosystem partners—mainly developers of complementary application products and services, and advertisers—to use more than one platform, that is, to have more than one "home." This "multi-homing" also fragments the market for "eyeball" attention and advertising dollars. It is similar in some ways but different from the notion of "switching costs." On Facebook, for example, switching costs for users are quite high. This is good for platform leadership. Facebook users are not likely to switch, suddenly, to another social networking site for their daily communications and move years of accumulated content—unless all of their friends simultaneously do so as well.
The conditions are not quite present for a VHS-like or a Wintel-like domination of social networking by one company.
At the same time, however, Facebook users tend to have more than one social networking account and spend lots of time on these other sites, for different purposes. They may use LinkedIn to look for professional contacts or Twitter to follow the news and particular events or people. They may go to Groupon or LivingSocial every day to look for bargains. They may follow their favorite musical band or get movie reviews on MySpace or another site. They go to Foursquare to find out where their friends are and get recommendations for restaurants or stores—now. In the future, it is possible that Facebook will offer these kinds of features and services itself—which would be a strategy to reduce differentiation and niche opportunities for competitors. But, at present, there is nothing in the Facebook platform that technically makes multi-homing difficult for individual users. On the other hand, application developers who invest in learning the Facebook APIs and programming languages will find it time consuming to rewrite their apps for more than one platform. Google is also putting a lot of pressure on Facebook to use more standard technologies. So there is some difficulty with multi-homing for application developers but it is not clear how important this is or how long Facebook can hold out.
Conclusion
In short, the conditions are not quite present for a VHS-like or a Wintel-like domination of social networking by one company. There are still opportunities for competitors to differentiate themselves and room for users and application developers to spread themselves around. The powerful network effects do suggest that large numbers of people will continue to sign up and use Facebook. But advertising is not so effective and nowhere near as profitable as packaged software (Microsoft) or fully automated digital services (Google), at least not yet. Nonetheless, Facebook and several other social networking sites have staying power and will continue to fight among themselves and with Google as well as Microsoft, Yahoo, and others for user eyeballs and their fair share of Internet advertising.
My guess is that Facebook will end up like Google—with 65% or so of the global market, a winner-take-most scenario. But Facebook as a company needs to explore better ways to make money as well as develop the capabilities to quickly add features and services that mimic Twitter, LinkedIn, MySpace, Foursquare, and Groupon. It may want to enter directly into commercial activities and try drawing user attention and advertising revenue from the two other most popular Internet sites, Amazon and eBay, or from the online classified ad specialist, Craigslist. The possibilities are nearly endless for a platform with 600 million users, and counting. But nothing is guaranteed. Facebook will still have to fight off competition from the social networking innovations that no one has thought of yet.
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