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Winners and prizes

21 February 2010

I discussed last week how different combinations of network effects and positive feedback loops have enabled a few winners to take something close to all the prizes in some markets. But we should beware of being deterministic and over-schematic about this – each case is different. Microsoft and eBay established effective monopolies where large numbers of customers have been lucratively locked-in: their customers face substantial switching costs. Google and Facebook are rather different.

Google’s shares both of the search audience and of the market for search-based advertising have continued to rise fairly steadily but its customers are loyal rather than locked-in. If they weren’t happy with what they’ve got they could quite easily switch to other search engines or advertising media. This is not because Google is vastly superior to other search engines. It certainly was for several years, but others, not least Microsoft’s Bing, now offer very good search and features that make them more suitable for some purposes. But they would have to be massively better to tempt more than a few consumers away, and they’d have to win millions of them before they could make a dent in Google’s share of the advertising market.

Google’s capabilities may not be quite as distinctive as they once were, but its customers are loyal, firstly because they are satisfied with what Google provides them, and secondly because Google is the standard in search and the biggest brand on the Web. In the case of advertisers, the calculation is simple: the enormous size of Google’s consumer audience and its economies of scale means that its ads can deliver more visitors to their sites than anyone else.

Facebook with 450 million users, is by far the biggest online social network and its site second only to Google in popularity, but it is not yet, so far as we know, a profitable business, let alone a monopoly. The value of its prize may not be clear for some time. So far its vast audience is generating less than 2 percent of Google’s advertising revenues. The big questions are whether it can improve on that and whether it can hold onto all those eyeballs. It does not yet have a proven business model.

It does enjoy some switching costs. Transferring all your settings to a rival social network is a hassle comparable to that of changing your bank account. – but what keeps most people there is that that’s where their friends are and they find Facebook a convenient and enjoyable platform for communicating with them. If those things changed, or if other sites offered something enticingly different, and their friends felt the same, they could just go. After all, more than 20 million MySpace users moved over to Facebook, after its phenomenal growth between 2004 and 2007.

Many explanations have been offered for why that switch happened. According to Michael Wolff, it’s because of how badly NewsCorp has handled MySpace and because Rupert Murdoch “has no idea” about how different technology businesses are from old media. According to Martin Giles of The Economist, it’s because Facebook has been much more technically innovative. There is probably some truth in both these hypotheses and other factors may have played a part, but if this switch is anything like previous ones between virtual networks, the biggest single one was the sheer momentum that developed behind Facebook from 2007 when its growth accelerated. All of a sudden it looked like the winner, the place where everybody was going, so that’s where everyone went. That’s what happened in the 1990s when Microsoft’s Internet Explorer replaced Netscape as the standard browser, in the 1980s when Apple was marginalised by Wintel and in the 1970s when Sony’s Betamax lost the VCR war with VHS.

The Internet and mobile phones have led to bigger and faster positive feedback loops, but it has always been self-fulfilling expectations that have fuelled social epidemics. Something very similar happened in the 1960s when American teenagers transferred their affections from the Beach Boys to the Beatles and in the 1950s when they embraced Rock ‘n Roll.

Facebook will probably prove a stickier site than MySpace, and it would certainly be surprising if it lost followers quickly, but we shouldn’t forget what happened to AOL, the first business to commercialise community online. The attachment of the millions of consumers it attracted in the 1990s did not prove long-lasting. Meteoric rises are often followed by precipitous falls. Holding onto prizes is always harder than winning them in the first place.

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