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Grahamites
Grahamites
Articles (273) 

How Facebook Dominated the Social Network World

A case study of Facebook's dominance in the social network world

December 13, 2017 | About:

Previously I’ve published my summary notes of the wonderful book, "Modern Monopolies – What It Takes to Dominate the 21st Century Economy," written by Alex Moazed and Nicholas Johnson. One of the examples from the book is how Facebook dominated the social network world and what it took to build a great platform company.

While Facebook (NASDAQ:FB) has already established dominance today, it wasn’t the first social network. In fact, a social network named Friendster was the first “large scale, successful social network." Friendster was launched in 2002 compared to Facebook in 2004. Friendster’s founder Jonathan Abrams built the website because he thought online dating was “too anonymous and creepy.” Abrams developed Friendster with the idea of enabling first degree and second degree connections among the users. Friendster grew quickly after launch and attracted more than 3 million users in 2003.

However, Friendster struggled to scale the technology to keep up with the growth because it struggle to buy enough servers to handle the calculation and algorithm. Loading speed slowed down dramatically and user experiences suffered as a result. Another of Friendster’s issues was user identity validation. Fake profiles were so prevalent that the quality of the network deteriorated badly. Friendster’s growth slowed significantly as a result.

Another social network that started before Facebook was MySpace. MySpace started as a social network for musicians to connect with their fans but quickly expanded to virtually anyone. MySpace allowed users to sign up with fake names and allowed all sorts of postings on the platform. MySpace also solved the server problem Friendster had by doing away “with the networking code that Friendster used to calculate degrees of friendship.” It also took a “laissez-faire” approach in terms of signing up users, viewing other users on the networ, and connecting with other users.

Like Friendster, MySpace grew rapidly. But most of the growth was low-quality growth. Junk advertising and spam spread across the network. Worse yet, child sex predators and minors who lied about their ages signed up, which generated a great amount of negative attention. “In February 2006, Connecticut attorney general Richard Blumenthal announced that he was launching a  investigation into minors' exposure to pornography on MySpace.” This announcement served as a final blow to Myspace. The website’s reputation plunged, along with the number of registered users.

Facebook, known as thefacebook back then, was launched in February 2004. Facebook took a very different approach than Friendster and MySpace from the beginning. First of all, “thefacebook was very specific about what-and who- it was for. Its initial homepage told users that they could ‘Search for people at your school; Find out who are in your classes; Look up your friends’ friends; See a visualization of your social network.’ And “Facebook was very careful about whom it allowed to join and was very deliberate about its growth. By requiring an .edu email address and mandating that users sign up under their real names, Facebook took a very different approach to building a network: one that prioritized the quality of its users and usage over sheer numbers.”

Facebook’s roll-out was intentionally slow – the network expanded first into other Ivy League schools and later into other schools. Zuckerberg also invented the “double-opt-in friending” feature to allow cross-campus connections. Zuckerberg resisted growing number of users as quickly as possible and “waited until the number of students on the waitlist for a given school passed about 20% of the student body before opening access. This strategy guaranteed that Facebook wouldn’t lack initial users when it opened up at a new school, and it could use students from other schools to build demand at adjacent schools. As a result, whenever Facebook opened the gates for a new collage, users typically exploded. Using this methodical approach, Facebook blanketed the college market.”

When it comes to the high school market, again Facebook took a methodical approach by allowing college students to invite their friends who were still in high school to join and only allowing users who got invitation to join. Once joined, users could invite other friends. Facebook used a similar approach and gradually opened up to anyone age 13 or older, businesses and now almost anyone. “As Mark Zuckerberg has repeated acknowledged, none of that success would have been possible without the platform’s very meticulous launch and growth strategy early on. By carefully sequencing and planning its early growth, Facebook succeeded.

Lessons from Facebook success?

  1. Most network effects are local, not global. Network density matters and the smaller network will create more transactions and more value.
  2. Facebook was built on top of a dense network of already existing real-world relationships. Facebook had a very specific use for a specific subset of people. It was laser focused on creating the tools that enabled its core users to interact. And its rules intentionally limited what information you could see based on what school you went to and who you were connected to.
  3. Not all growth is good growth. Growth is useful when it creates more value to users. Facebook established its core users first and expanded gradually.
  4. Facebook established its community culture and was very intentional about creating “a culture of real identity.” The focus on community culture set the tone for Facebook’s eventual explosive growth.
  5. Order in which you attract users can have a big impact on a network’s growth.

About the author:

Grahamites
A global value investor constantly seeking to acquire worldly wisdom. My investment philosophy has been inspired by Warren Buffett, Charlie Munger, Howard Marks, Chuck Akre, Li Lu, Zhang Lei and Peter Lynch.

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