Some years ago, when the Google Books project, which aims to digitise all of the world’s printed books, was getting under way, the two co-founders of Google were having a meeting with the librarian of one of the universities that had signed up for the plan. At one point in the conversation, the Google boys noticed that their collaborator had suddenly gone rather quiet. One of them asked him what was the matter. “Well”, he replied, “I’m wondering what happens to all this stuff when Google no longer exists.” Recounting the conversation to me later, he said: “I’ve never seen two young people looking so stunned: the idea that Google might not exist one day had never crossed their minds.”
And yet, of course, the librarian was right. He had to think about the next 400 years. But the number of commercial companies that are more than a century old is vanishingly small. Entrusting the world’s literary heritage to such transient organisations might not be entirely wise.
Compared with my librarian friend, we have the attention span of newts. We are constantly overawed by the size, wealth and dominance of whatever happens to be the current corporate giant. At the moment, the four leading monsters are Apple, Google, Facebook and Amazon. Yet 18 years ago, Apple was weeks away from extinction, Amazon had just launched, Google was still three years away from incorporation and Facebook lay nine years into the future.
At one level, all this proves is that in the technology world one can go from zero to hero is a very short time. (Or, in Apple’s case, from hero to zero and back to hero again in 36 years). Some of the industry’s greatest executives understood this very well. Andy Grove, for instance, who led Intel for 11 years, was famous for his mantra “Only the paranoid survive”. For many years – when he led Microsoft and before he embarked on saving the world – Bill Gates appeared to have the same sentiment tattooed on his forehead. And in both cases they turned out to be right: though Intel and Microsoft are still significant companies, their dominance has ended. The processors that dominate the market for mobile devices are designed by ARM, a Cambridge company, not by Intel; and Microsoft’s monopolistic grip on the desktop computing market turned out to be a wasting asset.
We understand pretty well the factors that determine the fortunes of companies that make things people buy – which is why, for example, one can predict that Apple wont be able indefinitely to sustain its huge profit margins on its i Devices. Likewise, it’s pretty easy to predict where Amazon is headed: it aims to be the Walmart of the web, and is therefore likely to be around for quite a while. Google has a well understood and currently profitable business model and a huge technical infrastructure but ultimately is vulnerable to a well-resourced competitor armed with better search technology.
This leaves Facebook, a company that has one billion products (called users) and earns its living by selling information about them to advertisers. Given that holders of Facebook accounts don’t pay for the service – and are therefore free to depart at any point – you’d have thought that its long-term durability would be questionable. And yet lots of informed and canny investors disagree. They appear to regard the company as a sure-fire bet.
The two key factors that will determine Facebook’s future are the power of network effects and the “stickiness” of its service – ie, the extent to which it can dissuade users from leaving. A network effect comes into play when the value of a product or service is dependent on the number of people using it. A telephone network with a million subscribers is infinitely more valuable then one with only 10. In technological ecosystems, network effects are very powerful: they explain, for example, how Microsoft came to dominate the market for desktop operating and office systems.
In the early days of online social networking there were a range of different, incompatible networks – Friendster, Orkut, MySpace and Facebook. But, over time, Facebook won out by attracting more users and growing more quickly than the others. And the more quickly it grew, the more powerful the network effect became, with the result that it is now the de facto standard for social networking. In fact, it is now so dominant that millions of people around the world think that Facebook is the internet.
If you put your faith in network effects, therefore, Facebook looks like a good investment because it’ll be around for the long term. If people want to do social networking, then it’ll be the only game in town. Facebook users will constitute a captive market and will be correspondingly exploited. And the company will be regulated as a monopoly.
Which is where “stickiness” comes in. How much exploitation will users tolerate before they decide to quit? We know a lot about network effects but relatively little about this, which is why a new study by three scientists at the Swiss university ETH Zurich makes interesting reading. They examined several social networking services, seeking to identify what makes them resilient and what could cause them to decline. And they performed an empirical autopsy on a failed service – Friendster – using data gathered just before it closed. The key determinants of success or failure were (i) the average number of friends that users have and (ii) whether the difficulty of using the site comes to outweigh the perceived benefits. Facebook is doing OK on the first of these criteria but – in my experience – becoming increasingly vulnerable on the second as the company tries to “monetise” its users. If Mark Zuckerberg’s empire can’t square this circle then not even the power of network effects will save it in the long run.
Source: http://www.guardian.co.uk
