The psychology of M&A always fascinates me. You Tube is supposedly worth more than MySpace not due to exponentially more active users, but since online video may someday revolutionize or even replace television. News Corp/Fox acquired MySpace at roughly a third of the price Google bought You Tube. Days after the announcement of the Google-You Tube transaction, Rupert Murdoch hacked MySpace’s user interface thus enabling users to view internet video more easily. Now MySpace’s user interface allows members to upload, share, and view all forms of internet video including You Tube’s, which carry no copyright or licensing fees.
Which scenario suits your fancy? Are you the slick techies going cuckoo for coco puffs buying ‘The Next Big Thing?‘ Or Are you the enterprising value investor buying scalable enterprises and quickly enjoying remarkable appreciation?
This brings us more specifically to the subject of Friendster. Sometimes when a company has a checkered past, a very low valuation, and considerably less active users than the market leaders, it may incorrectly be perceived as having negligible value and finite scalability. This is definitely untrue. With a new strategic direction Friendster is certaintainly a valuable business.
So, Why hasn’t anyone bought Friendster? The most significant impediment that continue to inhibit the sale of Friendster is the fact that management has not successfully implemented a sustainable business plan to simultaneously expand and monetize Friendster within a 1-2 year time period.
The problem with Friendster is a strategic one. Friendster fits into the strategy of a value minded acquirer who is creative and well-heeled enough to purchase a malleable social network at a relatively cheap valuation then spend two years rebuilding it into a leading brand in a number of emergent markets including social networking, avatar interactions within virtual worlds, avatar consumer transactions within virtual marketplaces, social shopping, mobile social networking, social media distribution, and social mashups.
Social networking is ever-evolving. The next MySpace, You Tube, eBay, or Google will be a social networking based company that efficiently facilitates user interactions and commercial transactions within an immersive virtual world. This virtual world must be a bottom-up creation, defined by the users’ collective imagination. It is a good idea for all consumer-based Web 2.0 startups to strategically utilize social networking as part of their approach to building and sustaining relationships with users. Social networking will become the operative core of many successful startups, as well as, a critical asset of the cogent branding and sales proposition of any business communicating with sales prospects and customers on the internet.
John Doerr, reputable partner of Kleiner, Perkins, Caufield, & Byers, was quoted in a New York Times article stating that “there are plenty of second acts in American business.” This may be true. Friendster and virtually all social networking companies have a serious opportunity to dynamically scale their businesses. Each social network will have to make specific strategic decisions to expand their businesses based on the needs, interests, preferences, and demographics of their own user base. However, there are some general key drivers that affect the success of service scalability. In my estimation, the success and long-term viability of social networking is based upon Seven Key Drivers that will expand and monetize social networking in the near future:
Hackerble Open Source Code: Today, users want to be able to ’play’ Hacker and reconstruct/deconstruct their user interface in a variety of ways affecting both design and technical features. It is imperative for all social networking sites to become open source then support users and third party developers in the development of customization features. Most prominent Blog publishing software are constructed in a very flexible manner to encourage individual users to write or cut/paste code to produce features that personalize and, in some cases, help monetize their blogs. There are also several “How-to Hack” websites and blogs that provide free skins, widgets, and scripts to promote the customization or Hackerbility of blog publishing platforms.
Scalable Core Technological Infrastructures: Social networks must be able to offer their users an ever increasing capacity for producing, uploading, viewing, and distributing rich media of all kinds. Page uploads, communications, and data transfers must occur at reasonable speeds with the expectancy of exponentially increasing registered users and gargantuan data file transfers in a multiplicity of formats.
Ugly Interfaces: Social networking sites must emphasize simplicity and customization in their interaction design. The more successful, less-obtrusive user interfaces are subtle and unremarkable. Google’s ’ugly’ or ’un-designed’ homepage is a fine example, among many, of the less is more formula that emphasizes functionality and information while eschewing the rich media design of the cluttered homepage of search rival Yahoo.
Avatar Collaborations Within Totally Immersive Virtual Worlds: This is the future of social networking and user interaction. When social networks begin to employ this open source technology correctly with the proper user empowerment principles and monetizing strategy, the number of global users of social networks could grow exponentially year over year for at least a decade. Any social network could experiment successfully with using avatars and virtual worlds to generate significant increases in active users.
Multilingual Usability, Instantly Translatable Data: Social networks must make it possible for various users to interact irrespective of their native languages or cultures. For example, a German speaker’s blogs, instant messages, etc. should be instantly translatable into a plethora of languages in order to facilitate the broadest possible social networking capacity.
Global Branding: Branding has become more difficult in the U.S. due to declining long-term brand loyalty among American teens and young adults. Branding capacity is strongest internationally where much of social networking’s potential lies. Southeast Asia, South Africa, the Middle East, Latin America, and Eastern Europe are viable international markets where social networks will soon gain traction.
User-Defined Social Groups, Work Groups: Social networks must enrich the capacity for interactions to the greatest extent possible. It is essential to actively promote sophisticated collaborative networking with self-defined, self-governed groups within the broader social network. By facilitating increased user clustering based on topical or social interests, social networks may elect to use group-specific targeting data to increase the success rates of advertiser ads. Groups do not adversely affect the openness of the network. For example, various users could receive ’visitor’s passes’ to enter a group for a specified period of time. This pass could be renewed or become permanent after a vote of all of the groups’ members.
If social networks seize this opportunity, then there will definitely be at least a dozen large, profitable social networking companies in the very near future.
Update: After publishing this post I ran across a great VC site that pretty much discusses similar topics pondering the potential mashing of social networks and virtual world-enabling open source technology-the site is The Equity Kicker and the posts of interests are: Virtual Worlds The Next Social Network and Habbo and Second Life