MySpace—founded in 2003—was one of the “original” big social media players. Its purchase by News Corp for US $580 million in 2005 launched a social media “gold rush.” Six years, later it is on the sales block for $50 million to $200 million (even though if has more than 42 million active unique monthly visitors). Meanwhile, Groupon—launched in 2008—is already floating the idea of a US $15 billion IPO with Goldman Sachs.
How did a company like Groupon create 100x the investor value so quickly? It was not simply second-mover advantage (i.e., building a better network). Instead it focuses on social networks as a “means” to creating value, not an “end” in itself.
Moving social networks from an ‘end’ to a ‘means’ of doing business
When talking about social networking, social media, Web 2.0, etc., a lot of people fall into the trap of citing Metcalfe’s Law, that the value of the network is proportional to the square of the number of connected members. Under this assumption, a social network with 42 million active monthly users (e.g., MySpace) would be roughly 7x more valuable than one with 16 million (e.g., Groupon).
Obviously, this assumption does not hold. The reason why is simple: the value of all network connections is not the same. On the top line, a connection that drives commerce purchases generates much more revenue than one that simply increases advertising click-thrus. On the bottom line, a connection that only communicates 140 text characters costs much less to deliver than one that streams video.
Thinking about this from the start
This provides a valuable lesson when using social media to create value:
- Don’t just focus on the number of members (or connections between them)
- Instead, focus on maximizing the net value of the connection between members: not just your revenue minus cost, but also the value your members perceive of the connection vs. the effort required to maintain it
- If you do this, your members (and partners) will organically grow (because they value your network)
Combined, “large numbers of connections” X “large value per connection” = “large network value”.
This is why Groupon created so much value so quickly. It is also a lesson to those who will take through social media the next stage of the technology adoption life cycle: focus on using social media as a means to connect and create value, not just an end in itself.