Does the copy-cat prevalence of social network startups reflect a lack of imagination or initiative on the part of web entrepreneurs? Or is there a real market opportunity?
I asked myself this question after reading a Wharton article covering Twitter, a couple febrile postings in TechCrunch and the recent mass media coverage of Twitter message volumes. I was struck by how many entrepreneurs were now fully engaged in monetizing Twitter even before Twitter has figured out how to monetize Twitter.
What does this tell us? Why would a business model based on creating ever-greater volumes of extremely low-value, transient information cause such a stir?
In preparing an answer, let's take a quick, broad, loosely historical look at how the software industry makes money and how we got here:
- Originally, information systems were deployed as a form of automation where tasks previously performed by humans were now performed on computers (enterprise software).
- With the advent of the personal computer, automation was supplemented with productivity applications that improve the quality of human work without necessarily replacing the human (ms office).
- The personal computer also introduced software purely for entertainment (flight simulator) which quickly moved onto gaming platforms.
- With the Internet, software took on the additional attributes of a communications channel that coexists with and partially absorbs older communications (email and IM).
- Broadband networking allowed software to become an entertainment medium to compete with radio, TV and film (youtube).
- Social networking software, I suggest, is actually a mash-up of personal productivity, communications and entertainment software.
Now consider now how you make money in each of these categories: The enterprise software business model is essentially automation: If a customer spends $X capital, he/she can save $Y expense, and/or get more data processing work done faster and more accurately. Enterprise software has high R&D startup costs, high prices and is a salesperson driven business. It is also now a mature business, with the bigger markets dominated by a few very large companies.
With productivity and communications software, the value proposition doesn't really include quantifiable savings. Instead, it's something like: If you as an individual or company deploy $X, you can improve your personal or employee productivity by Y% by automating certain tasks. Productivity software typically has more modest startup R&D costs, consumer market prices and is a marketing-driven business.
Game software is analogous to filmed entertainment, where spectacle is combined with interactivity, and emotional benefits to the consumer are everything. R&D and marketing costs can be considerable.
By the time we get to social networking software, the business model does away with savings altogether: Such sites are based on creating page-hits, similar to "hits" as in the music, film or book businesses. Sheer popularity and mass audience is the ultimate source of value.
Social software success has much less to do with technology, being mainly dependent on creating feel-good emotional resonance with a mass audience via self-promotional networking. Creating hits for a fickle mass audience is difficult to do; ideally, you want low production costs, because you know that many failures come along with the few that make it big. And social sites can also take a very long time to make money, since advertising itself can interfere with the site's core values.
But startups offering free-to-consumer social networks may not be just the usual "I'm just like Facebook except bla bla bla…" -- although they are certainly that as well. Social network sites and services may also be a rational response to our maturing software markets and our currently depressed business conditions. Consider:
- Startup capital is shrinking, with fewer high R&D startups funded, and social sites have much lower startup costs.
- Enterprise software is a mature industry with fewer profitable opportunities, and social sites have much lower initial barriers to entry, and don't need proprietary intellectual property.
- Productivity software growth is now primarily on the web where the productivity improvements are mainly about how to better exploit the web's networks, and hence a natural adjunct to social networks.
- Gaming applications, when not hosted on a console, are also natural additions to social network sites.
- Broadband communications costs are more prevalent, becoming a utility, like water and power, and enabling the ever larger mass audiences necessary for eventual monetization.
- Discretionary spending of all types is down, and a "free" offer is as powerful as ever.
Social networking sites are managed quite differently from traditional software businesses, being much less dependent on technical innovation, much more venture capital-efficient, much more dependent on operational integrity, and hugely dependent on the mass-market, mind-meld and promotional skills such as those found in the entertainment industry.
And as in the entertainment industry, I suspect there will be relatively few franchise opportunities (such as Facebook or LinkedIn), just as there are few blockbuster films (such as Star Wars or James Bond). There will also be difficulty defending market share, since the business is not based on proprietary IP, and staying "cool" is problematic (e.g., MySpace).
Finally, like the entertainment business, a lot of site ideas will smack of utter triviality; but if the name of the game is emotional connections in a mass audience, that comes with the territory. And expect to see such companies headed by non-technical types who look more like entertainment moguls and less like Bill Gates.