MySpace, Facebook and Other Social Networking Sites: Hot Today, Gone Tomorrow?

MySpace, Facebook and Other Social Networking Sites: Hot Today, Gone Tomorrow?

Published: May 03, 2006 in Knowledge@Wharton

Popular
social networking sites, including MySpace and Facebook, are changing
the human fabric of the Internet and have the potential to pay off big
for investors, but — given their youthful user base — they are
unusually vulnerable to the next ‘new new’ thing. As quickly as users
flock to one trendy Internet site, they can just as quickly move on to
another, with no advance warning, according to Wharton faculty and
Internet analysts.

MySpace, with 70 million visitors, has become the digital equivalent
of hanging out at the mall for today’s teens, who load the site with
photos, news about music groups and detailed profiles of their likes
and dislikes. Other social network sites include Facebook, geared to
college students, LinkedIn, aimed at professionals, and Xanga, a
blog-based community site. In all, an estimated 300 sites, including
smaller ones such as StudyBreakers for high schoolers and Photobucket,
a site for posting images, make up the social network universe.

Wharton marketing professor David Bell
says the long-term success of these sites will depend on their ability
to retain the interest of their members. "There is a fad or a fashion
component to all these networks. Some will come and go," says Bell. The
classic example, he suggests, is Friendster, which burst onto the
Internet in 2003 and soon had 20 million visitors. Late last year, it
slipped below a million after MySpace and other sites with better music
and video capability lured Friendster users away. "A lot of the
[success] is serendipitous. These things can have exponential growth.
Then, if another community shows up that has better functionality in
some way, there can be a mass migration."

Wharton marketing professor Peter Fader
agrees that social network sites are powerful, but mercurial,
particularly since most are aimed at teenagers and young adults. "It’s
a complete crap shoot. Look how many of these have come along and how
many were touted as the next big thing. How many have disappeared
completely or find themselves in some strange little unexplainable
niche?"

He points to Orkut, an invitation-only service introduced by Google
in 2004 that is little known in the United States, but wildly popular
in Brazil, where more than 70% of its users are based. Indeed, Orkut
has made Portugese a second language in its interface. "In Brazil it’s
gold, but in the U.S., where the service is domiciled, nobody’s even
heard of Orkut. And there’s no good reason why."

While MySpace and Facebook currently rule the popular crowd on the
Internet social scene, Fader says the forces that make a hot site are
difficult to quantify; any site could become the next outcast. "There
is no reason to believe that these, or future ones that are emerging on
the radar screen, will be any different. I don’t think anyone can come
up with a genuine reason why they have become so popular, outside of
20-20 hindsight." Echoing that point, an article in the April 30 New York Times
reports that AOL plans to launch a social networking site to be called
AIM Pages as a competitor to MySpace, Yahoo360 and other such services.

One way for investors to benefit from the rise of social networks
would be develop a highly diverse portfolio, Fader adds. "I have no
problem with betting on a crapshoot, but you want to hedge your bets
carefully and accept the downside in exchange for what could be an
incredible upside. You can’t control your destiny with these nearly as
much as any other web site or portal."

Next Target: Cell Phones

For the moment, MySpace and Facebook are hot. News Corp. paid $580
million last year for MySpace as part of a $1.3 billion Internet
acquisition spree. Facebook just received an additional $25 million in
venture capital.

Both companies are planning to extend their reach beyond the
computer screen to cell phones. Cingular Wireless, Sprint Nextel and
Verizon Wireless are starting a service that will allow users to post
messages on Facebook’s home pages or search for other users’ phone
numbers and email addresses from a cell phone. MySpace has a pact with
Helio, a wireless joint venture between SK Telecom and Earthlink, that
will allow users to send photos and update their blogs or profiles by
cell phone.

According to ComScore Media Metrix, MySpace, with its 70 million
users, ranks second behind Yahoo in pages viewed and time spent on the
site. Facebook, founded by a 21-year-old student on leave from Harvard
and backed by Silicon Valley venture capitalists, has 7.3 million
registered users.

Chris Hughes, a spokesperson for Facebook, says the company thinks
of itself more as a directory grounded in real life rather than a
social network creating connections between strangers. "We model
people’s real lives at their individual schools in a virtual space that
enables them to exchange information about themselves. We are not
focused on meeting new people, dating or anything like that. Instead,
we want to manage information efficiently so that we can provide our
users the information that matters most to them."

Social networking sites in general rely mainly on a simple
advertising model — selling banner and text ads (although they ban
uncool pop up ads). Facebook also permits sponsored groups in which a
marketer can build communities within the site. BusinessWeek
recently reported that Facebook had rejected a $750 million buyout
offer and was holding out for $2 billion. "That number is nothing but
rumor," Hughes says.

When it comes to placing a valuation on the social network sites, Wharton marketing professor Leonard Lodish
says traditional tools, such as the discounted present value of the
profit stream, apply to these new Internet networks as much as they do
to any other business. He recalls an argument he had with marketing
students during the Internet boom of 2000 about Internet music seller
CDNow. Lodish said the firm would never be able to justify costs of $70
to attain each customer. The following year the firm declared
bankruptcy.

In the case of MySpace and Facebook, Lodish points out, the cost of
gaining new customers is practically nothing because users join
voluntarily and provide their own content through their profiles. In
addition, the cost of running the sites’ web servers is relatively low.
If a classic advertising or subscription revenue model is used, he
says, low-cost social network sites could be highly profitable.

Yahoo must buy or develop content for its site to attract
advertisers and Google has to invest in its search capabilities, Lodish
notes. "Yahoo makes a lot of money selling ads on its sites. Why can’t
Facebook and MySpace do the same thing?"

Nitin Gupta, an analyst with The Yankee Group in Boston, says
MySpace is rooted in linking emerging bands to new fans, which makes it
a logical partner for a media company, such as News Corp. The company
can use the site to test or build buzz around its products. "These have
become almost living systems, as the social network has begun to expand
beyond a place for people with certain musical tastes and become
popular for dating and all sorts of things."

While the MySpace population has grown, the site’s roots remain in
media, Gupta adds. "Today, it continues to be used to identify
individuals interested in, not just music, but television and radio as
well." Before News Corp. bought MySpace, NBC used it to show clips of
"The Office" before the show was aired on the network. While media
companies may be a more logical fit with a social networking site,
other businesses might mesh too, according to Gupta. "It’s a little
more difficult to build a community around a Norelco razor, but it’s
possible."

Meanwhile, Gupta says, social networks have power beyond ad revenue
to act as a customer relationship management (CRM) tool for companies
selling products or services. "There’s a lot of focus on advertising
and banner ads and the amount of traffic. But it’s important to look
beyond traditional forms of web adverting to see the real potential —
which is leveraging the connectivity of the sites and using them to
form communities around products, media or services to really be in
contact with your users."

Still, he acknowledges, it will not be easy to convert those
relationships to new revenue sources. "The future is in finding ways to
monetize the online community beyond just traditional web advertising,
although it’s going to be difficult for online communities, even those
behemoths like MySpace."

According to Wharton professor of operations and information management Eric K. Clemons,
connectivity is nice, but the Internet bust of 2000 showed that revenue
is what matters. "As we learned from the first dot-com silliness, value
is not in click-through or eyeballs. Value comes from revenues …. Can
you sell subscriptions to your data or your service? Can you charge for
referrals or for purchases that result from referrals? Can you sell
stuff? If not, your revenue is zero and your market value is zero."

Safety and Privacy Concerns

As MySpace and other social networking sites have grown, so, too,
have concerns about Internet safety and privacy. The Center for Missing
and Exploited Children reported more than 2,600 incidents of adults
using the web to target children online in order to engage in sexual
activity. In March, federal prosecutors in Connecticut charged
two men with using MySpace to contact youths with whom they later had
sexual contact. Following Congressional hearings about online sexual
predators, MySpace hired a safety czar to improve the site’s
protections for young users.

The popularity of social networking sites may also have unexpected
consequences for users. A gay student attending a Christian college was
expelled after administration officials viewed photos of the student in
drag on Facebook. Twenty middle school students in California were
suspended after participating in a MySpace group where one student
allegedly threatened to kill another and made anti-Semitic remarks. In
Kansas, authorities arrested five teenagers after one of the suspects
used MySpace to outline plans for a Columbine-like attack on the boys’
school.

Gary Arlen, president of Arlen Communications, a Bethesda, Md.,
research and consulting firm, says MySpace users may also begin to shy
away as they grasp the long-term consequences of putting up photos of
wild parties or tales of sexual bravado. "This stuff may come back to
haunt you 20 years from now. MySpace runs the risk of a social
reaction, but that is part of being the pioneer."

Despite those obstacles, he is enthusiastic about social networks’
promise, although he says the sites’ ultimate value is less clear-cut
than other Internet successes, such as eBay and Amazon. "It may be that
this is a very slow play because the existing sites, Friendster and now
MySpace and Facebook, are building a habit among young users. It will
become a part of how they operate in their 20s and 30s. This service
will be part of the landscape."

According to Bell, there are strategies that social network sites
can use to avoid becoming tomorrow’s abandoned property. One way to
retain a site’s aura is to limit membership. For example, Bell notes
that when Diesel jeans faced the problem of losing marketing cachet by
becoming too popular, the brand cut back on the number of outlets it
would sell to. Facebook tries to limit itself to college students.
Social networks seem to operate best when they strike a balance between
heterogeneity, which provides large numbers of members, and
selectivity, which keeps the hordes focused and engaged in the site, he
says, adding that social networking sites also must keep pace with
technology and provide new features — for example, fast downloads. "To
create stickiness you must have functional value and also community
value. If either of those becomes diluted, you give people a reason to
start looking elsewhere."

As a web-based business, social networks do have some advantages
over traditional companies in tracking user behavior in order to detect
problems early. "If you are sophisticated, you can measure and monitor
the rate at which users join and you can detect early warning signs,
such as a drop off in the number of people interacting," says Bell.
"There would be metrics to monitor if you are headed in the wrong
direction."

Bell also cautions that sites will need to remain subtle in their
approach to marketing if they are to build on their current success.
While they provide banner and text ads, even more valuable
word-of-mouth promotion lurks in the buzz within user profile pages.
"Part of the popularity of these things is that they are more credible
and not explicitly commercial," he says. "If somebody on the Mac
fanatic site tells me about iPod, it’s more credible than Mac
advertising. If people feel the networks are too corporate, that’s a
turnoff."

Still, no matter how their future takes shape, Bell says these
types of networks are ingrained in Internet society. "They’re here to
stay. Like eBay, they are embedded now. The idea of joining online
communities and being able to participate in them is not going to
disappear."

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