Simplifying greatly, we might say the first wave of the Internet was search. The one we’re in the middle of now is social networking (it comes in many forms: myspace, orkut, msn spaces, facebook, secondlife, yelp). To me right now, Facebook looks like the clear winner of this phase. First, every metric of their traffic and usage is formidable. Second, they are truly excellent with their product. I haven’t seen them make a significant product or strategic mistake in the last 2 years, as they have been inexorably migrating from their college market to a much broader market appeal. (some say they should stick to their college knitting, but I personally think their aims for world domination are a much better path.) I think Yahoo made a big mistake not to offer Facebook whatever they wanted last summer.
Their growth since Sept 06 shows they jumped to the mainstream, and there’s no looking back now. Facebook has an open field. They are the only social network that got big while keeping their interface clean, and the name/brand is universally appealing. Their product reflects the understanding that they need to be a utility, just like Microsoft and Google, (I mean, look at Facebook’s new design and UI, including their crappy little Microsoft icons and Microsoft pull down menus. They’re emulating MS whether they know it consciously or not). Once they get the interface which gets their people to search from Facebook instead of going to Google, they’ll be able to cut a deal with Google and capture the bulk of the value, say 80% of the revenue.
So what’s interesting about this social networking wave is that like the operating system wave of the 1980’s, there is an inherent, real network effect to the business. That’s not true of Google. They have a network effect in the number of advertisers bidding on their keywords, which makes them more profitable per query than #2 Yahoo, but that effect doesn’t translate into greater defensibility due to a fundamental network effect for Google users. What Google has is a brand effect. Very powerful, indeed. But not a true “I get more out of using them because everyone else is using them.” Facebook could achieve that true network effect in the next 24 months.
Further, like Microsoft was able to get into applications in the 1980’s with Word, Excel, PowerPoint, Outlook, Exchange, etc., Facebook can add a large number of social apps on top of their platform. Classifieds, Music, search, digital goods, virtual worlds, currencies. As Michael Birch of Bebo said a few months ago, “I think the next big thing is still social networking because it can morph into whatever is next.” Very true. And Facebook can do just that, just as Microsoft did.
If I were Yahoo, I would want to buy Facebook to stay relevant. If I were Microsoft, I’d want to buy them so I can stay relevant and have another shot at the network effect operating system business. If I were Google, I’d want to buy them for both those reasons, and also because I’d want to keep Microsoft from getting back in the ring. But if I’m Facebook I’d want to stay independent, so I could build the next empire and maybe bring new ideas to how to make a difference in the world through technology. Here’s hoping they stay independent.