June 13, 2012

Facebook will remain king, but social pure plays will fade


Facebook collage by Jennifer Daniel

Look for the rise of sites with deep social features

This is second of a three-part series on Facebook as an investment. Also see:
Facebook’s biggest barrier to enormous wealth? Trust
Brands: How to cut your exposure to Facebook business risk

Christopher RollysonFacebook will remain the dominant popular social network in many markets for many years, and it won’t have to worry about being “displaced” by another social network the way that it displaced MySpace. In the near term, this lack of competition will give the company some breathing room, but a more daunting threat awaits: the waning of social network pure plays’ influence by 2017. Nonetheless, the fate of pure plays should be top of mind for serious Facebook investors: to produce the fabulous returns that current investors expect, Facebook will have to move far beyond adverts.

In part one of this series, I argued that Facebook had a significant trust gap with users that would inhibit its ability to monetize its most unique and valuable assets, and that the trust gap was recently compounded by its “IPO irregularities.” Below I’ll take a different tack and analyze the investment prospects of Facebook the platform.

Social networks’ disappointing investment results

Pure play social networks (Friendster, MySpace, Facebook, LinkedIn) have not lived up to investors’ ROI aspirations, despite the fact that people (‘users”) have loved the networks and lavished mind-boggling amounts of time on them. The Web 1.0 logic behind investor expectations held that the more time people spent on the sites, the more ads they would see and the more they would click. #fail

In retrospect, it is understandable that pure plays’ management and investors didn’t appreciate social networks’ social context. It turns out that very few people understand the intricacies of “sociality,” much less how to wire it into a value proposition or a business ROI. Continue reading