Social Networking: The Millennial Application Moves Out of its Parents’ Basement

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Born into the PC era of neutral browsers and open web opportunity, companies like Facebook now grope for revenues in a new era dominated by harsh platform masters with an “app” access model that forces social networkers into a box.  Desktop users keep social network tabs open all day as a bases for value creating activities ranging from games to media streaming, but mobile users open social apps with a purpose and close them when they move on.  This puts broad social networks at risk, as circles of more narrow interest emerge and grow as distinct apps, and as Apple, Google and Microsoft co-opt monetization opportunities for themselves.  The platform owners carry extraordinary advantage as the inherent conflicts with social networks play out, but now, they struggle as mightily to establish their own social communities as the newcomers do with revenue streams.  This momentary stasis opens the door for focused social apps, like Pinterest, Yelp, LinkedIn and others, to establish critical mass as acquisition bait rather than cannon fodder for platform players.  Ultimately, broad social networks might be better served on mobile platforms as portfolios of focused apps leveraging a common user data base.

The first successful social networks, like Facebook, were built for the PC era of neutral browsers with tabs that stayed open.  In a 2001 consent decree with the DoJ, Microsoft was forced to separate Internet Explorer from Windows, leaving the browser as a neutral window that favored no particular web site.  Social networking was born into this government mandated equal playing field, with Facebook, in particular, designed as an always open platform for its user base to communicate and share with one another, and in the process, provide valuable user profile data, receive well targeted ads and engage in revenue generating auxiliary applications

In the portable platform era, social networks are apps, called by users for a specific reason and closed after each use – favoring best-of-breed over jack-of-all-trades.  Portable device apps are rapidly becoming the primary mode of consumer internet access.  Unlike PC browsers, apps do not remain open between uses, limiting their effectiveness as platforms in their own right.  Rather than launch one app to get to another app, users may prefer to access auxiliary applications – e.g. photo sharing, media streaming, news feeds, social games, etc. – directly, diluting the value of broad social networking sites in favor of focused ones

The platform owners – Apple, Google, and Microsoft – have significant advantage in pursuing revenue opportunities vs. social networkers.  Apple and Google have been aggressive in integrating emerging high-value functions directly into their platforms with each release, squeezing out 3rd party apps in the process.  The platform owners also choose default apps that are pre-installed, forcing the choice on their users for a hefty fee from the app provider.  Finally, both top platforms ask for a 30% cut of all app revenue and Apple prohibits apps from linking directly to standard web sites.  This tightly controlled environment severely limits the revenue opportunities for apps, including social networkers.

Platform owners are moving to integrate their own social networking solutions, but struggle just as social networkers struggle with monetization.  Social networking could be a powerful integrated function for portable platforms, but the owners have had little success, with only Google+ gaining any traction at all.  Meanwhile, most social networkers, and notably Facebook, have failed to articulate viable models for growing their revenue streams from their mobile apps.  One answer may be cooperation, and Apple and Microsoft have been receptive, thus far, toward integrating both Facebook and Twitter more tightly into their platforms.  Nonetheless, these relationships are not free and could prove transient as these companies also continue to explore ways to build social awareness into their own applications.

Best-of-breed social networks, establishing critical mass for valuable markets and barriers to competition, will be acquisition targets and could thrive across platforms.  Platform owners may look to loosen their reliance on 3rd party social networking through acquisitions, most likely looking at smaller, more focused, social apps.  These best-of-breed sites, having established sustainable advantage in functionally defined markets, could also play across platforms, provided that they establish clear sources of revenue.  The salient example is LinkedIn, with its professional demographic and recruiting/job search revenue model.

The best strategy for Jack-of-all-trades social networks might be as portfolios of narrowly defined social apps linked by a common user base and service infrastructure.  Facebook could launch targeted apps that address specific activities, such as game playing, photo sharing, reviews and recommendations, topical discussion, media distribution, etc., all leveraged against its massive user base and extensive social graph.  Doing so would resolve the unwieldy user experience of its mobile app, potentially improving its delivery mechanism for advertising, emphasizing revenue generating services and extending the Facebook brand in the process.  It could also establish a better context for licensing its API to 3rd parties.  However, such an approach would not countermand the power of platform owners to integrate similar functionality, favor alternatives or to extract a share of revenues.

This scenario is good for Apple, Google and Microsoft, and bad for Facebook.  Well differentiated, focused social apps may also benefit.  We have written extensively of the advantages that the platform owners wield in the new era.  While Apple, Google and Microsoft have struggled to build relevant social networks, the ability to integrate social functionality directly into platform software and with other high value cloud applications is a substantial boost to these efforts as the penetration of portable devices expands.  Meanwhile, the paradigm shift to the app model is unequivocally bad for Facebook, which is already struggling with the restraints of the platform owner controlled environment.  We do see opportunity for focused, revenue friendly social apps with critical mass and barriers to completion to generate value and to attract M&A interest.  Examples include LinkedIn, OpenTable, Twitter, and Pinterest.

For more full text, please see our published research archive.

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