On the future of social networks

Facebook’s valuation seems to be built upon a winner takes all model for social networking. I do not think this is the way things will pan out. Everyone seems to be looking at a repeat of Microsoft and Google’s dominance as the models for the future but this is wrong.

Through brilliant strategy Microsoft was the only tech company to bet that software not hardware was the key to pre-eminence and nobody ever caught them. Other eighties PC makers like Commodore, Apple, Atari, Acorn insisted on control over both hardware and software leaving MS with a virtually open field. Google produced a search algorithm that was qualitatively better than anything else around at the time and nobody has ever caught up. There is a myth that all that Google has these days is brand but I occasionally try other search engines and they are still actually worse.

So Microsoft had a strategic advantage and Google had a technical advantage. Facebook has neither. It’s appeal over MySpace is primarily design. It was this which prompted them to tidy away the applications onto a separate page to get back to that clean, uncluttered look.

Now if they implement friend connect so someone can have an account on MySpace which shows their facebook friends they will make the barriers to entry for a new network much lower. The two things keeping people with facebook are: good design and their friends. Now if full data portability were implemented allowing people to access their friends on other networks one huge barrier to competition has gone.

In other words facebook would have done to social networks what Microsoft did to PC manufacturers: commoditise them. Unfortunately by opening up this far facebook will be commoditising itself. Then the only differentiator would be its clean design. It would be interesting to see what happened if someone launched a stripped down social network with the following features: news feed, photo sharing, personal info, wall, integration with email. No apps, no vampires, no SuperFunFunnyWalls.

Of course facebook could just turn off friend connect if they decided a worthy competitor had emerged. The risk is that the competitor has turned up some Google-style special sauce that would make them stick with them and not with facebook.

Pic: Brian Solis

On useful advertising

A friend of mine came back from Cuba and said he had met the most beautiful woman he had ever seen. But that is another story. He also said how refreshing it was not to see a single advert or brand in the time he was there. I have never been there so I don’t know how accurate this is but I find the idea appealing.

In the future people are going to see fewer advertisements. This should be the aim of the advertising industry – fewer ads, more relevant, more welcome. People have an instinctive resistance to advertising built up from years of exposure to incessant, irrelevant ads. Spammers are derided but they work on a similar principle as TV advertisers: get your ad in front of enough people and someone will respond. The only real game changer we have seen is Google who could sell advertisers the attention of the people who were searching on a particular keyword.

Social networks have similar potential to Google as they are, in essence, giant marketing databases. The problem is that none of them have worked out how to use them effectively. The most notable attempt so far, faceook’s Beacon, managed to create a system which for the first time actively irritated users. I’m not sure this is what Zuckerberg had in mind when he said media changes every 100 years but the outcome reminded me of Doc Brown wiring the flux capacitor wrongly and getting a load of rubbish blown in his face (or something). The bottom line is you should not be using your giant marketing database to cause highly targeted annoyance.

People don’t want no advertising. Social networks have the potential to be great discovery engines and deliver ads people actually want to see, but they are currently failing.

On $100m and $15bn

Facebook CFO Gideon Yu has just announced a $100m loan from TriplePointCapital which is bad news and good news.

The bad news is if FB was able to sustain a $15bn valuation you would always go for the tiny dilution that would represent rather than saddle the company with debt of any kind. It suggests to me that nobody was willing to pony up $100m for 0.67% of the share capital, not even investors who had previously invested at that level. To that extent I agree with Primack that the high valuation has hurt FB. With equity funds apparently cut off without climbing down from the big 15 it is now effectively forced into borrowing until it finds a viable revenue model and even then they are relying on a fairly small pool of potential creditors. With the credit crunch few banks would lend to FB at all and those that did would only do so at a punishing interest rate – perhaps calculating that if the worst came to the worst Microsoft would ride to the rescue and pump in more cash having shown considerable willingness to do so in the past. I don’t think TriplePoint is being any more generous.

This adds to speculation that FB is overvalued and the feeling that MS, Li Ka Shing and the Samwers will be left with with red faces. Maybe, maybe not. For MS it was a strategic investment. The stake was less important than the exclusivity deal which would keep FB banner advertising away from Google until at least 2011. For the others, who are rumoured by Blodget to have had a different deal to MS, it was essentially a bet that either FB would devise its Adwords or one of the outside developers would. As I said in my earlier post I think if FB or one of its outside devs works this out both will be in the money. This is why FB opened their platform in the first place and why VCs would be wise to continue throwing money at, or making strategic investments in (for any VCs reading), FB app developers even if not now FB itself.

What they are all aiming for is showing companies that FB can revolutionise advertising as much as Google did. Ultimately, all companies want to know is who is likely to be interested in buying their products. In the pre-Google days advertisers would blast adverts at everyone watching a particular TV show or reading a particular paper on the basis that some small proportion of those watching would be receptive to the message. There was some scope for demographic targeting but it was relatively crude. Google revolutionised advertising by showing companies they knew more precisely who was interested in buying what. FB has a chance of repeating this success because of the vast amount of information it holds on its users.

This brings us to the good news: the $100m will be spent on expanding server capacity. Now $100 is a lot to spend on servers but FB can fill it with some very valuable information that Google doesn’t have. Whereas Google gets a snapshot of what is on someones mind then serves ads relevant to that FB has much more depth, of course Google is not taking this lying down but FB is still in the box seat as it holds the data. Not only does FB know what an individual person is interested in it also knows what all their friends like and, most importantly in my view, it can link otherwise unconnected users through their stated interests. Put together, all of these patterns are fantastically valuable if they can be analysed correctly. Beacon was clumsy and met with outcry from FB users but that failure does not mean all attempts at analysing the user data FB holds to serve contextual ads will automatically meet with the same response.

People are perfectly happy to look at relevant, helpful ads if it’s done in the right way. Google proved this by separating its organic search results from its sponsored links, this is the reason why we are talking about Larry, Sergey and Google today, not Bill Gross and Overture (see Ch 5 of The Search by Battelle). I’m always interested in finding interesting, new films that I would not have come across otherwise. One way is to read niche sites like Ruthless Reviews but another is for FB to help me out. It already knows what my favourite films are and also who else on FB likes the same stuff: Moodysson, Clarke, Greengrass, Stone, etc.

Why not analyse my connections with other users through those lists and serve me suggestions of interesting new stuff which is on other users’ lists but not mine? I would be interested to see suggestions based on the favourites of other users with similar tastes, it worked for Last.fm so why not FB? I buy DVDs all the time, link me to a store and I’ll probably buy, FB takes a cut of the sale et voilà! A business model for facebook! I bought Sophie Scholl the other day on the basis of an Amazon reccomendation and a glance at the synopsis. It turned out I loved it. Amazon knew from my previous purchases that I was into modern German film, served up an approproate ad and made a sale. Once I had watched it I dutifuly added it to my favourite films on FB and yet the only ads I get is for stuff I have almost no interest in.

Why do you treat me this way Mr Zuckerberg? I have told you everything you need to know – give me relevant ads!

This point is similar to the one I was making about delicious in my On Yahoo post. Google was so sucessful at analysing the web 1.0 world because it had the best way to analyse the connections between pages. The Google sized spot for web 2.0 is still open and it will be filled by the company which can analyse links between people as well as PageRank does links between pages. It is that propsect which makes investors pay $15bn for facebook, it may not be FB which ultimately wins the prize but some company will.

On Arseblog, OleOle and facebook

On Wednesday one of my favourite non-technology blogs, Arseblog, was acquired by OleOle, the football centric social network. I’m not even an Arsenal fan but Arseblogger is one of the best writers around and I always enjoy reading his entertaining posts on the ups and downs of the Flamster et al. He’s there 7 days per week come rain or shine with something interesting to read, even for the general football fan and this has led to the acquisition by OleOle.

OleOle is a football social network. I know that niche social networks are the new thing and I can sort of see the value in one based around the worlds biggest sport. That said I started out as a social network sceptic and I am not totally cured. Any new venture, OleOle included, faces the facebook dilemmas – Why can’t I do this on facebook? and Why should I be arsed to set up another account somewhere else?

Also facebook, brilliant though it is, still has the feel of a Google looking for its Adwords. There is no doubt that facebook can sell things, I’ve bought stuff after seeing updates from my friends and I can begin to understand the $15bn valuation since FB will be worth a lot more if they crack it. I have no idea what is going on inside facebook but from the outside it looks like a fair amount of stumbling around. As far as I understand it most of their cash comes from a big ad deal with MS which is not really a good basis for an independent business.

I see the merit in opening up the platform to developers – if even a tiny percentage manage to develop a money generating widget facebook is in the hay without having to do anything. The problem is that none of the widgets make any money (please correct me if I’m wrong) not even Slide with its pedigree. Levchin himself recently conceded that startups had to look beyond advertising but that $80bn by 2010 pie which drew MS to Yahoo looks mighty inviting and most people can’t take their eyes off it even though they know Google will eat most of it.

FB has a chance too but it needs to make it far easier to buy straight from the site then take a cut from the sale. I’ve already told FB what my favourite films are and through that it can link to other like minded people and recommend me things I might be interested in. FB doesn’t do this right now – at least not in any way I notice when I’m using it.

Ultimately that’s all advertising is – getting people you trust to recommend things you like. One of my favourite film reviwers is Matt Cale, every time he releases his top 10 films of the year I buy the number one sight unseen and I’m never disappointed. I never would have bought Cocaine Cowboys were it not for his review but he doesn’t see any cut from the sale. And I won’t see any cut when you rush to Amazon to buy it either, but you will buy it.