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,
a T. Eisenmann et al. “Facebook’s Platforms,”
Harvard Business School Case #9-808-128,
2009, p. 1.
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 (
PlaySta-tion), 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
to win in a platform
war, it helps if
a platform
generates strong
network effects.
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.
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 Har-
vard 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 bil-
lion (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 num-
ber 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 in-
conceivable 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 like-
ly to be worth to Facebook investors?
We can examine aspects of these ques-
tions 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 exchang-
ing photos and video clips with their
friends, and friends of their friends—
b Some of the data on Facebook is from the Har-
vard case cited previously, the Facebook Web
site ( http://www.facebook.com), and the Wiki-
pedia entry on “Facebook.”