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.”