Social Networking is Not an industry

Hello all and Happy New Year!

Well, here we are welcoming in another year of the new millennium and the changes in business opportunity continue. If our president somehow doesn't land us in another war, the technology economy will keep prospering. One day I may write on this topic, but I wish to keep my analysis apolitical at this time. Ignoring the effects of the greater world around us, when the technology economy always comes down to a consumer purchasing a service or product, would be just silly.

So, for now I will share my thoughts on the Web 2.0, Social Networking, and Virtual World technology enabled business opportunity space. Much of these thoughts have been provoked by a very interesting thinker in this area, Jay Deragon (see http://jayderagon.com/blog/) and his blog entry on Plaxo Pulse. In Jay's latest entry, he discusses how various industry observers view the future of Social Networking. Here is my response, that I emailed to Jay:

I fully agree with your fist couple of paragraphs, as a broad generality.

When I was in business school at USC (Executive MBA program), I had a professor who provided a fascinating, statistical and research based general view of industry dominance. It seemed that this applied to almost any industry, and it is one of the tools I have used now for 20 years.

Within the dominance game for an industry, market forces seem to settle on three distinct market leaders that will usually divide a market into 40%-20%-10% with the remaining 30% being divided among niche players. As a market gets more mature, the leaders will eat up niche players reducing the outlying circle and increasing the difference between the major players. In some circumstances, the three leaders can evenly split the majority of the market, especially when their differentiation is perceived to be minor. The data books for time and materials estimation was a good example of this in 1989. Chilton, Motor and Mitchell each had about 27% to 30% of the automotive repair information market, with the remaining being shared by tiny niche players. This was a very mature market and ripe for technologically enhanced change, which happened. Another industry that can be used as an example is today's computer operating system space for the desktop and server markets. The dynamics rarely allow for four to share the huge majority of industry market.

We are already seeing this happen in the technology generated social network space. I don't know what the market share is for LinkedIn, Plaxo Pulse, Facebook, and MySpace, plus the hundreds of niche sites that either license the underlying technology of the leaders, or have developed specialty markets to be served with an evolved focus. But, I can give you an example of a newer SN site that is highly specialized and growing like mad: nextcat.com. Nextcat focuses on the Creatives within the entertainment industry, with the obvious overlap to the business development and producer subset of the same industry.

I believe that the issue that is raised in the Newsweek article is on the financial basis of comparison, where the question of sustainable revenue streams is such a challenge. With a niche SN group the revenue stream is much smaller, but more confident. With a corporate site that uses SN, the purpose is to generate customer or vendor alliance. Hence, when we try to look at SN as an infrastructure for a mass market, the trouble really begins.

Best regards,
Harrison

What do you think?