Social media has been a transient field. For many years, today's winners were tomorrow's out-of-business failures.
MySpace, Friendster, Classmates.com, Orkut, Digg, and so many more either flamed out brilliantly or still exist in some sad, tiny form. Sometimes the next big thing goes from media sensation to flameout almost instantly. Remember Ello, the social media site that was going to be the noncommercial Facebook (NASDAQ:FB)?
It came and it went with a brief moment in the sun in which everyone clamored for an invitation -- only to get one, realize most people weren't there, and leave. Ello, like MySpace and Classmates, still exists, but it's an empty husk trying to find a niche.
Social media remains an evolving market, but the best opportunities for long-term investors come from two companies that are already succeeding: Facebook and LinkedIn (NYSE:LNKD.DL). The two have their pluses and minuses, with Mark Zuckerberg's social network being the stronger company, but both have achieved a critical mass of users.
This creates a huge barrier to entry for would-be competitors and makes it far easier to branch into other business areas. Facebook is much farther along in that respect, but LinkedIn's base of users gives it a number of possible areas for expansion, too.
If you have the people, you have an advantage, and both Facebook and LinkedIn have the people.
Why users matter
Facebook is no longer cool. Your grandmother is there, as is your kindergarten teacher and every person you barely remember from high school. Pundits continually predict that the platform's popularity will somehow drive younger users away -- and that might be true in the short-term -- but ultimately it will bring them back.
If you only listen to niche bands that never achieve mass popularity, you won't necessarily miss anything. But if you skip the Maroon 5 of social media, Facebook, you won't know the date of your class reunion, when various friends' parents pass away, or so many other important life milestones that are now shared on the social site.
You might not want to be on Facebook, but you have to be there. Any company that has nearly 1 billion daily active users, along with well over 1 billion using it on a non-daily basis, pretty much has to be considered mandatory.
LinkedIn only reported 364 million members in its most recent earnings report, but its users are all professionals who are either using it to find a job or maintaining a presence for networking and future employment purposes. Having a LinkedIn profile has become as necessary for most white-collar workers as a resume.
In 2012, 93% of companies used LinkedIn for hiring purposes, up from 87% in 2011 and 78% in 2010, according to Staff.com. That's a staggering number -- maybe too high to be credible, actually -- but the reality is that LinkedIn has become part of the recruitment process; if you choose to not be there, you might be choosing to not work.
Something to build on
Facebook has already demonstrated that having a critical mass of users makes it possible to leverage that audience to grow other products. In spinning off its Messenger app from Facebook proper, the company created a product that as of March had 600 million users, according to Statista. Add that to the 700 million people using WhatsApp, which Facebook purchased, and the company has a messaging platform that rivals its core property.
WhatsApp was an acquisition, but Messenger was a case of Facebook using its audience to boost a product that helps ensure its future. The company could conceivably do the same -- albeit less directly -- with its Oculus virtual reality platform or anything else in its portfolio.
LinkedIn is earlier in the game than Facebook. But the company is making an effort to increase engagement by offering more content (including some material from The Motley Fool), and it could take those efforts even further by launching conferences, educational opportunities, or countless other services that leverage its user base.
It's not what it was
Previous social networks burned out because the companies did not evolve or recognized change too late. It would be hard for that to happen to Facebook or LinkedIn -- their leads in total audience would make it easy for them to see a clever new idea as it develops. If a company thinks of the next social revolution, Facebook could create its own version before its rival hit critical mass. Similarly, LinkedIn would have time to adapt before any other company could achieve a sufficient user base to threaten its core business.
Any company can stumble, but the social media world is no longer the untamed wilderness that brought down so many past leaders. The landscape has settled, and that has positioned Facebook and LinkedIn for long-term gains.