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Why The Current Crop of Social Networks Can Not Survive

Posted: March 5th, 2014 | Author: | Filed under: Companies, Facebook, Google | Tags: , , , , , | No Comments »

While the current group of social networks are extremely popular and appear wildly unassailable, it is my assertion that they are eminently fallable.  Over the past year, it has become obvious that they are having difficulty attracting users.  Facebook needs to grow by purchasing smaller companies for ever increasing amounts of money.  Google can’t really build a critical mass of users around it’s offering even though it is technically excellent.  Even with Twitter, the most non-social of the social networks, there is trouble attracting new users while implementing features to increase their revenue streams.

Arguably, one could claim that as everyone joins the network, there aren’t additional people to add, this is the theory of saturation.  While Facebook tries to assert that their daily active users is huge, and people are spending more time than ever logged in to facebook, how many of those actives are just people checking their messages?  Or have facebook set up on their mobile and are technically logged in all day.  This is a fantasy, people aren’t really using these services as much as they would have you believe.

Originally the promise of social networking was that people who we knew, and even more compelling, people that we don’t really know would create excellent and relevant content, thereby attracting even more people who would create great content.  This would create the virtuous cycle of content creation and given the user growth would make the platform lucrative in it’s advertising reach.  This is all known, what I believe everyone is currently ignoring in bubble, unicorn herd fashion, is that the cycle has been severely weakened, and their revenue models are broken.

Chicago: bubble house

What is ironic is that it has been weakened by the very thing that has made such scale on the internet viable: The desire of advertisers to pay for access to the social users.

It is a scenario that plays out in every market everywhere.  Initially someone produces something of value, and the market forms around that.  As the product evolves, the producer can easily see what works, as far as encouraging margin and price growth, and what doesn’t work, what causes price and margin decrease.

Most recently we have seen this occur in the PC market.  We are now to the point where vendors are completely optimizing on a single dimension, price.  Computer buyers ( obviously except those who purchase macs ) have spoken with their dollars, and their dollars want the best value for money.  Hence, netbooks, and $300 laptops loaded to the gills with shizware.  While it is shocking that people will accept this, this is what the consumer has chosen.

The social space works the same way.  The users of the social product, gmail, facebook, google search, etc… are the product, and the advertisers are the customer.  At first, users were drawn to the utility and functionality of the services.  In Facebook’s case, interestingly, the initial value proposition was that one could have a private relationship out of the view of the internet with their friends.  There was originally no danger that their content would appear to anyone for whom they had decided it shouldn’t.

As time has continued and these services have attained what they believe is a critical mass of users, the impetus for them to improve the service and protect their users’ privacy or to provide real value to the users diminished.  The incremental income for each new user was less than could be made by increasing the amount that the advertisers were willing to pay.  This has been accomplished either increasing, or inventing new areas in which to deliver ads, I.E. the facebook feed, paper, etc… In effect allowing the service to sell more inventory and spam their internal user base.  Or taking content that was originally private, but could be used to deliver ads, and making it public.  I won’t even start on the morality of the latter, but they have no choice, a free product at internet scale can not serve two masters, but it has to.

As anecdotal evidence, try to remember the last time you saw something interesting in the facebook feed, something that really grabbed you in a meaningful way. If you are like me, you can’t really ever remember anything really valuable that you’ve seen in the feed.

In actuality, the feed is built, designed, and optimized to deliver ads, not to deliver content of the highest quality to it’s users.  In fact, the deeper the quality content is buried, the more ads you have to wade through to find it, thereby increasing the services’ revenue.

What all of this has resulted in, is a number of once useful services, that have thoroughly optimized themselves to deliver ads, and have intrinsically lost their original value to the users.  This is what killed myspace, friendster, etc… This will ultimately kill Google ( albeit more slowly ), Facebook, and probably ultimately Twitter.

The reason the current model of social networks is untenable is that they are all designed around ads.  None of them, at least the “big successful” ones are designed around users paying, and optimizing around value for the paying user.  This will cause the end of the great social free ad-subsidized internet bubble at some point.

The reason I suggest that it will kill Google more slowly, if at all, is that Google obviously realizes that it’s current revenue model is untenable.  They are aggressively seeking out real value for money products to which they can transition when the ad revenue model dries up and the users flee their free online services.  People are just bored with these sites, there is nothing on them.

The same thing has happened to television.  The reason people are “cord cutting” is because bundling is designed to deliver advertising, not value to the TV services’ customers.  People aren’t stupid forever, eventually they realize they are being hornswaggled, basically paying twice.  Once in their monthly bill, the second time with their time.  It is just a matter of when.