Topic Archive: Social Networking

Dec 10
2003

With all this attention from mainstream media and VC's, it seems inevitable that social networking is destined to go through a mini bubble and crash, hopefully followed by a sustainable recovery, much like the internet bubble. It's pretty clear what's sustaining the bubble. Whenever you hear about $50M+ valuations for companies with no revenue and no clear business model, it's usually a good sign that we're in a bubble. The interesting question is what is going to cause the crash, and is there anything that can be done to prevent it?

There are many issues with social networking that could cause it to fail such as privacy and the lack of clear busines models. However, I think the single biggest thing that is going to kill social networking is also the one thing that is driving the boom in social networking today. Basically, social networking is going to end up being the victim of its own success. If you look at what's driving the investment in social networking, it's the viral spread and network effect of the technology. Bill Gurley from Benchmark states:

"Free e-mail like Hotmail had viral marketing but not increasing returns. I see both in this social-networking thing. As the network gets bigger and bigger, there's more value to incremental users"

If the appealing thing about social networking companies is their ability to create large communities of connected users, you then want to go out and sign up as many users as possible. After all, more users equals bigger network, more viral spread, and hence sustainable increase in eyeballs for subcriptions, targeted ads, etc. If you follow this logic, the ultimate end goal for social networking is to have everyone connected via six degrees of separation. In fact, this is exactly what's happening today with social networking and therein lies the problem.

I'm starting to hear stories about people who join social networking sites and end up with networks of thousands and even tens of thousands of people. You also hear amusing stories about how these people receive requests from total strangers to connect them with other total strangers. You then have to start wondering how much value there is in a social network of tens of thousands of people you barely know. The net result is that people try the social networking sites, find limited value, and then move on. If this is the typical usage pattern from your customers, you don't have a sustainable business, especially from a revenue perspective.

Going back to the question of how to prevent a crash in social networking, I think companies need to focus on the value proposition behind social networking. The focus should not be on growing the network and viral spread. Building companies on business models alone is always a bad idea. The focus should be on coming up with technology that enable users to control, manage, prioritize, and nurture their social networks on an ongoing basis. The proritization and nurturing technology is going to be essential for social networking to succeed long term.

The second thing that companies need to focus on is educating their users on networking. Just because you have an email list with ten thousand names doesn't make you a master telemarketer, the same applies for social networking. Many professional networkers network with a specific purpose and they have their own best practices and techniques. Some people go so far as to create their own wishlist of people they would like to meet and their networking activities are driven by this list. Since professional social networking is new for many people, companies are going to have to guide and educate their users to ensure they get the maximum value out of their social networks.

In conclusion, I think the true value of social networking is in the ability to manage and nurture your network of relationships for a specific purpose. After all, why invest time, energy, and money in social networking if you don't have a specific purpose? Now that social networking companies have all this money, let's hope they focus on the value to prevent social networking from becoming a victim of its own success.




Oct 02
2003

David Kirkpatrick from Fortune has written an article called "I Get By With a Little Help From My Friends of Friends of Friends" that is a look at the emerging social networking space. It's a well written piece that does a great job of explaining the current social networking space for a mainstream business audience.

I also happen to be one of the people that is quoted in the article. David ran across my blog entry on Social Networking and that's how the quote ended up in Fortune. Interestingly enough, it also turned out that David and I are connected by two via a very well connected mutual friend. It would have been a better story if we connected via one of the social networking sites and ended up striking up a conversation on our mutual interest in social networking. The fact that it happened the good old fashioned way via web surfing and email indicates that the potential for Social Networking is there but it's still in the early stages.

The whole experience has left me with a greater appreciation of the ability of blogs to spread ideas and discussions on current topics in near real-time. Blogging tools such as trackbacks, RSS feeds, and blogging search engines now make it much easier to track new ideas and take a pulse on current topics. If you think about it, it is amazing how technology such as blogging, social networking, and the internet are really bringing us all closer and allowing us to interact with greater efficiency and with greater impact than ever before. It makes you wonder how you lived without the internet.


Sep 17
2003

Yesterday, I attended the MIT/Stanford Vlab event on Social Networking and Business Models. I didn't take notes, but Stewart Butterfield has a great writeup on the event which captures the general atmosphere.

Although the event was entertaining, I didn't feel that the panelists provided much insight on business models for social networks. Any attempt by Tony Perkins to really dig into the details was met with a flip response (mostly from Jonathan Abrams, Founder and CEO Friendster), or a generic response about how creating value will lead to paying subscribers. Either the panelists weren't sure about a business model for social networks, or they had all the answers but didn't feel like sharing their thoughts with potential competitors in the room. It's not a surprise given that it's still in the early stages.

Despite the lack of real meaty discussion about the business model, there was a lot of useful insight and discussions about the social networking space. There was a general consensus that the social networking space would be very different a year from now and that it would come down to the size and branding of the networks determining the value and success of these companies, rather than barriers to entry and competitive differentiation by product features and intellectual property. There was also many references to Match.com as a success story and how you need just a small percentage of your audience to convert to paying customers to grow and sustain a healthy business with high margins. Lastly, there was an amusing discussion around the need to connect "closed gardens" of social networks and provide standards, which I think is essential if we're going to have a healthy social networking space.

I really do think that Social Networking is an exciting and emerging phenomenon that's going to have a big impact on how we interact with our friends, colleagues, and business associates. However, given what I've seen so far, I feel that these small players are going to get absorbed/crushed by the Yahoo's, MSN, and Google's of the world. We will see social networking functionality become an integrated service provided in an application suite. Just like Microsoft Outlook and Yahoo have email, calendars, and address books, it wouldn't be a stretch to extend their services to support social networking functionality. They already have the captive audience and branding so adding social networking functionality isn't really a high barrier to entry for them. We should all stay tuned for a lot of interesting M&A activity in this space, rather than the next big thing.


Sep 04
2003

For some reason, Hollywood goes through these periods where major studios race each other to get the same type of movies made on the concept du jour. In 1998, it was insects and asteroids. There was "A Bug's Life" and "Antz", as well as "Armageddon" and "Deep Impact". It's either a sign of borg like thinking from Hollywood executives or a sign of incestuous Hollywood relationships.

You also see the same phenomena in Silicon Valley. During the boom, you saw many companies going after the "new new" thing with little to differentiate one company from the next. You're starting to see the same phenomena today with Social Networking software with companies such as Friendster, eMode, Ryze, LinkedIn, Spoke, Tribe.Net, and Affinity Engines. Out of this list, Friendster seems to be getting the most buzz with the recent investment of $1M from prominent Silicon Valley executives such as Tim Koogle (former CEO of Yahoo), Ram Shiram (Google Board Member), and Peter Thiel (former CEO of PayPal).

Social Networking software is an interesting concept because it's all about applying software to efficiently track and manage the network of personal relationships. It's almost like the CRM/ERP of people's professional and personal lives. It's designed to help people look for new relationships (ie. acquire customers), maximize existing relationships (ie. sell to the installed base) as well as optimize their social interactions (ie. order management, manufacturing, supply chain, and distribution). If you look at how people do these tasks today, you could argue that it's a green field opportunity. It's no wonder that VC's are now making their bets among these emerging companies.

In some ways, Social Networking software is not a new concept. Existing technology such as mailing lists, bulletin boards, webrings, Yahoo Groups, and instant messaging are all examples of technology that facilitates social interaction and networking. It's common for people to make introductions and recommendations via an email chain that keeps getting forwarded across a relationship chain. The difference with the new crop of social networking technologies is that they focus on the multiple levels of relationships to leverage the so-called network effect or the "Six degrees of Separation". For example, with Affinity Engines InCircle product, you can blast emails out to your network as well as your network's network of contacts and keep going. Of course, there are privacy issues and potential abuse so these companies typically have ways of controlling privacy and the level of noise vs legitimate traffic in these networks.

So unlike Hollywood movies about insects, Social Networking software is based on an idea that has real merit and could have a significant impact on our personal and professional relationships. However, just like Hollywood studios, it looks like there are too many companies chasing this space without much differentiation nor innovation. If you sign up with one network, you'll soon realize that they're pretty much similar in functionality. There are some differentiators such as Spoke's ability to determine your network from your Outlook address book and sent emails, but the general functionality is pretty much the same.

An even bigger problem with these social networking software companies is the lack of standards and interoperability. Just like Hollywood studios who don't collaborate and cooperate with each other to make movies, each social network is essentially a closed community. Also, just like multiplayer online games, you have to invest in a social network to build it up before you really start enjoying the benefits. After you do it for a couple of sites, you start wishing that there was a product like Trillian to provide interoperability between these networks. An even better solution would be come up with a metadata standard for social networks. You can then create your profile and network definition once, saving you the hassle of building up your profile and contacts in every network.

Unless the emerging companies come together to form some standards, I can see them never reaching the critical mass to be successful as an independent entity. The more likely scenario is for an AOL or a Yahoo to emulate their functionality or acquire them and then bring the service into their own closed user community where they can achieve critical mass and profitability. This wouldn't be a bad thing for the investors, but I think it will be a loss for the emerging social networking space. As an industry, we've already made the same mistake with instant messaging, let's not repeat it with social networking.