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 Facebook 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

the conditions are
not quite present
for a Vhs-like or
a Wintel-like
domination of social
networking by
one company.

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.

At the same time, however, Face-
book 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 con-
tacts 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 fol-
low 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 recom-
mendations for restaurants or stores—
now. In the future, it is possible that
Facebook will offer these kinds of fea-
tures and services itself—which would
be a strategy to reduce differentiation
and niche opportunities for competi-
tors. But, at present, there is nothing
in the Facebook platform that techni-
cally makes multi-homing difficult for
individual users. On the other hand,
application developers who invest in
learning the Facebook APIs and pro-
gramming 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.

 

Michael A. Cusumano ( [e-mail]) is a professor at the MIt sloan school of Management and school of engineering and author of Staying Power: Six Enduring Principles for Managing Strategy and Innovation in an Unpredictable World (oxford university Press, 2010).

copyright held by author.