MySpace's reign was short. Founded in 2003, it surged to become the world's most visited social-networking site. Just in time to witness MySpace's unfortunate demise in the light of Facebook's (NASDAQ: FB) success, News Corp. acquired the company in 2005. For four more years, the company held its own at the top before Facebook soared past MySpace to become the world's leading social network, as we know it today.
Could the same thing happen to Facebook today? Does a newer social network with a better experience have a chance at out-competing Facebook?
No way. Here are two reasons why.
A network effect is one of the most powerful forms of a competitive advantage. Companies whose services become more useful with each additional user who joins the platform benefit from a network effect. A classic example is eBay. The more buyers and sellers in the marketplace, the more useful the marketplace becomes.
MySpace benefited from a network effect. Though its emphasis on a niche market of teenagers and music artists, combined with an arguably poor experience relative to Facebook, prevented the company from growing fast enough to reach a critical mass.
Facebook's current network effect is about as powerful as we've ever seen. With 1.15 billion monthly active users and 699 million daily active users, most people in the Western world with access to high-speed Internet have friends and family already on the service. If there is a critical mass a service must reach in its respective market to reap the benefits of the network effect, Facebook has reached it.
There are real switching costs to leaving Facebook. First, and foremost, attempting to use a newer platform, like Google+, means leaving friends and family who already actively use the platform.
But there are other costs that may be even more troublesome. Facebook users are building a history of their lives on Facebook. According to a recent statement from Facebook to the Huffington Post, hundreds of millions of photos are uploaded to Facebook every day. Sure, there are ways to transfer photos from Facebook to services such as Google's, but plan on setting aside anywhere from a few hours to days, depending on how many photos you have and your Internet speed. You can also plan on losing all your photo's comments, likes, tags, and shares -- they aren't coming with you to your new social platform. Plus, don't count on your family or friends to go through all the effort to transfer all their photos.
And that's just your photos. Say adios to your status updates, too. Basically, you would have to say goodbye to a well-documented history: yours, your family's, and your friends'.
For decades ...
Facebook's demise is unlikely. A decade from now, you'll still probably be logging on to the same site to post photos of your most recent meaningful excursion. With Facebook stock trading at a valuation that makes sense only if the service is going to be around for decades, investors seem to agree.
On this note, if Facebook is in your portfolio, I wouldn't sell on the stock's recent run-up. Instead, I would hold true to Warren Buffett's dogma:"Our favorite holding period is forever." Facebook shareholders should give this company a chance to show them what it can do with 699 million daily active users -- because it's going to be around for decades.
Another stock benefiting from a powerful network effect
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