Market Diffusion of Online Social Networks

March 5th, 2008 seph250 Posted in Internet |

Online Social Networks have seen huge success in the last five years, going from less than one million users in 2003, to an aggregate of over 100 million users today. This market diffusion has been fueled by broadband penetration, mobile access, international expansion, product improvements and the obvious network externalities. This recent diffusion has changed the entire industry, shifting power from traditional internet leaders (Microsoft, Google) to the social networking sites (Facebook, MySpace). In this chart here, I am simplifying data from Alexa and inferring the number of uniques users from comscore reports, and quantcast data. I’ll consider the number of unique visits as the number of “customers” these sites has.

Broadband Penetration Increasing

A major external factor limiting market diffusion of any product is distribution footprint. Since social networks are an Internet product, let’s consider internet access as a measure of a sites distribution potential. Broadband penetration in the US has increased from 33% in 2003 to 85% in 2008 , allowing increased distribution of online social networks. This growth has been a major fuel for social network diffusion.

Improvements in Mobile Access

Ease of access to online social networks via mobile devices has also improved dramatically in the last few years. In February 2006, Helio launched a phone featuring MySpace Mobile that allows users to perform the most popular MySpace functions. Another milestone was the launch of Apple’s iPhone in June 2006. The iPhone’s improved browser interface makes interacting with a social network much easier.

However, not everyone wants to access their social network on the go. According to Jupiter Research, only 2% of cell phone users use their mobile device to access an online social network while 12% of social network users are interested in accessing the sites on their phones. However, for some people without broadband, mobile access is their only way to participate. To capitalize on this, in September 2007, MySpace announced plans to launch a free ad-supported mobile phone. If they pull this off, it would open MySpace to users without broadband or mobile access today and grow their user base considerably.

Product Improvements

Another major factor influencing diffusion of social networks is the continuous improvement of the social networks themselves. Features such as content creation; flexible customization of pages and the ability to share media are adding greater utility for consumers and ultimately drawing more people to social networks. For example, at the time of launch of all three major social networks, there was no method for a user to upload and share videos. However, MySpace launched a video sharing functionality in January 2006 , and Facebook launched the feature in May 2007.

International Expansion

Major social networks are taking advantage of the scale of the Internet to diffuse their products and to create value beyond the US. In 2006, after being acquired by Fox Interactive,

MySpace expanded into 15 foreign countries, developing local versions of the site and marketing the site internationally. Currently, MySpace has developed local versions of its site for 24 different countries.

In fact, despite Friendster’s decreasing popularity in the US, it grew substantially in Asia in 2007, which now account for 89% of its unique monthly visitors.

Industry Evolution

Shift in Market Power

With the increased diffusion of social networks, the dynamics of the industry have changed dramatically. Just five years ago many people regarded social networks as a fad and waste of time. However, today with Myspace and Facebook producing so much traffic, they are regarded as extremely powerful companies. An indicator of this is when in October 2007 Microsoft paid $240 million for just a 1.6% stake in Facebook.

Transformation from IT Companies to Media Portal

When social networks first emerged, their primary focus was on communications and networking. However, in the last few years the sites have evolved to be more like media portals. For MySpace, this was driven partly by its acquisition by News Corp, a major media company, in 2005.

The result is that these social networks are now competing, not just with each other, but with more traditional portals like Yahoo, AOL and MSN, as well as media sites such as YouTube and Flickr.

Transformation from a Walled Garden to a Platform

Another important aspect of the industry evolution is that Social Networks are opening up their APIs and allowing other companies to develop and market applications that run on them. Facebook announced the Facebook platform in May 2007 and as a result over 5000 companies and independent developers are currently developing applications that run on Facebook.

This changes the industry, because now these developers no longer look at Facebook as competition but as a powerful ecosystem within which they can profit.

In November 2007, MySpace committed to the Open Social standard developed by Google allowing third parties to develop applications that run on MySpace and other social networks such as Bebo, Ning, Plaxo and Six Apart. Similar to Facebook, Myspace has also announced a developer platform.

Overall, the online social network industry is rapidly growing and dynamic. The factors driving market diffusion, such as broadband penetration, improving mobile access and product improvements are themselves continuing to evolve. The market structure and industry evolution indicate that social networks are poised for continued growth as the late majority begin to create their profiles.