There appears to be a certain inevitability to Facebook as captured in the weekly rise of its private market valuation. There are good reasons for this sentiment: over 500 million members, an organizing tool of revolutions deposing despots of many decades, and the inability of other established Internet players like Google and Microsoft to catch it despite dollars, smart minds, and a lot of effort. These are just a few of the many good reasons for the collective faith in Facebook.
The interesting question is whether anyone is discounting their valuation of Facebook to account for the possibility that its dominance will not be forever. As everyone is familiar, Facebook by now has achieved a success that is in a different league than Friendster and MySpace, so while it’s only so relevant, it is still worth noting that those social networks came and went despite having drawn many users initially. Friendster went because of technical issues, and while not on the scale of those problems, Facebook has not been immune from those both on its website and its mobile app, and at times the design and performance can seem surprisingly amateur. On top of the technical issues, there is the recurring annoyance of its ever-evolving privacy policy and other such gaffes.
More importantly, Facebook loses its importance when users stop engaging with it. It’s not inevitable that folks will retain their interest in Facebook, and certainly everyone has anecdotal evidence of some friends logging in less often over time. As far as I can tell, the most sticky elements are status updates and photos, but eventually some folks get bored with the chatter. It will be interesting to see whether this is a greater problem over time and whether those who are disengaging are anomalies or canaries in the coal mine.
Nor are there really any great switching costs. The closest things to switching costs are replicating the network of friends, historical status updates, and collections of photos. But my guess is that users can easily walk away from status updates and photos. Photos on Facebook are not like the precious family albums of two decades ago and to the extent that any of these photos have that sort of sentimental value, it is unlikely that users are keeping their sole copies on Facebook, particularly given the lack of resolution of Facebook’s photos. And even if users are doing so in some instances, these photos can be downloaded off Facebook rather easily. The network of friends is important, but can be replicated if Facebook loses mass appeal or if there is a compelling alternative reason to do so. Indeed, generally, think of people’s willingness to switch email addresses when google debuted Gmail to see that switching costs are often exaggerated.
Again, I am not asserting that Facebook is going away and I certainly wouldn’t put money on it. But I also wouldn’t consider it inevitable that Facebook will maintain its dominance such as to justify its increasing valuation without more critical analysis. I would be hedging my bets.
I am going to follow-up soon with a post regarding how entrepreneurs should play this
