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 ( cusumano@mit.edu) 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.