Line Vs. Facebook and the Future of Social Networking

With Line’s IPO, I thought this would be a good time to ask about the role that new social networks will play in the larger social network ecosystem. Will they cannibalize Facebook’s usage? Or can we expect to see the biggest players continue to be dominant in social networking?

For those of you who don’t know, social networking has a special place in my heart. In 1997, I launched the world’s first online social network called sixdegrees. And as part of that, we wrote a patent that defined a social network as the ability to index multiple relationships in a single database. It gives you the ability to see the people you don’t know through the people you do know.

I want to focus on the expectation that we had in 1997 when we launched sixdegrees, which is one that I think many people have had over the past 20 years while observing online social networks. In 1997, we assumed that the incumbent player in the social space would accrue a massive advantage over their competitors. The reason for that is because the incumbent player is building a true network effect model.

A “network effect” is one where each incremental user derives exponentially more value than the prior users because the prior users are already part of the system. For example, if we made the claim when we launched sixdegrees that you could meet anyone in the world through the people you knew, but there were only two other people in the database, the service would be of limited value to you.

And, in fact, the network effect probably has little benefit for the third person, and the fourth person, and the fifth person. But at some point, you cross a threshold where it actually begins to be true that the nth person joining a system is beginning to derive value because of all of the people who have joined prior to them.

The network effect also applied to the telephone, invented well over 100 years ago. If you were one of the first two people to buy a telephone, it wasn’t of much use to you. But as millions of people began to use telephones, you saw the network effect take hold. The nth person was deriving exponentially more value than the people prior to them joining. So, you might expect that the law of network effects would govern social networks. Once a company crossed a critical threshold, you might think we wouldn’t see reinventions of social networks. We’d be seeing a dominant player and then we wouldn’t be seeing any others.

But the history of social networks has been anything but that. sixdegrees was the largest social network until Friendster was the largest social network until Myspace was the largest social network until Facebook. Now while sixdegrees measured its members in the millions, Facebook is now measuring its members in the billions. And you would surely expect that when a social network user has absolute certainty that when they join, just about everyone they know is already going to be on the network, that it would be very difficult for new social networks to take hold.

By social networks, I’m referring to any service where the core piece of functionality revolves around some semblance of a contact manager where you have a list of people who have either validated your relationship to them or it’s a situation where you’re following them and they’re following you. All of these social networks have that central asset as their core.

Even with Facebook’s billion plus members, what we’ve actually seen over the past year is a decrease in user engagement. Now, there are different metrics by which you could consider user engagement, whether it’s with minutes, posts, or shares. The reason behind some of Facebook’s declining user engagement metrics is that they’re being cannibalized by new social networks, which is exactly the opposite of our law of the network effect.

My own sense now is, after watching the social networking space for 20 years, that we’re going to see new social networks, whether they’re new because of their user experience or because of their UI, will continue to emerge and cannibalize existing social networks. The brilliance of Facebook is that after they achieved such a large size, they’ve been able to maintain their position over the past several years not by reinventing Facebook, but by acquiring their competitors like Whatsapp and Instagram. What we’re seeing is that the cannibalization is occurring both through their own properties and through properties like Snapchat and Line. What’s interesting is this notion that the largest player will not be able to crowd out new entrants.

My prediction is that over the course of the next 3, 5, or 10 years, you will begin seeing people use social networking apps that you haven’t heard of today. And if Facebook is going to continue being the dominant company, it will not be because Facebook reinvents itself. It will be because they have figured out how to continuously use their currency to acquire new social networking apps.