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Assessing the Value of Social Networking in an Over-Heated Market



January 13, 2008 By

2007 went out with signs that the first wave of social networking excitement reached what Wall Street would call a market top. 

To recap, Microsoft paid $240 million for a 1.6 percent equity stake in Facebook that included an exclusive ad deal. The move effectively boosted Facebook's market valuation to $15 billion and made News Corp.'s $580 million purchase of MySpace in 2005 look like a bargain. Google responded by announcing OpenSocial, a social networking platform that lets third-party developers create widgets to use personal data and profile connections across social networking sites (inadvertently fueling calls for the FTC to create a Do Not Track registry).

The invitation was open to all comers - including Google's own Orkut, LinkedIn, Ning, Nexo, Plaxo and Twango, and even MySpace (which, while still leading in traffic and membership, struggled with its own platform strategy and was surpassed in the battle for buzz).

Perhaps you've already made up your mind about social networking, either by opening accounts on these services or restricting - or carefully monitoring - your kids' online socializing. To its credit, the National Electronic Commerce Coordinating Council held a symposium to explore what social networking means to the act of governing. The result is a new report, Government in the Age of YouTube: Implications of Internet Social Networks to Government, which is cautiously optimistic in content and cautious in tone. (See Government Should Use YouTube, Second Life and Other Web 2.0 Sites for more on the report.)

As social networking ascended to the "peak of inflated expectations"- Gartner's language for another flavor of a market top - what has been largely overlooked is that social networking DNA contradicts the long-established "network effect," which posits that a network's value rises with the number of users. Social networks actually lose value when they grow too large - the promised intimacy succumbs to spam-level volumes of "friend requests."

The Economist observed that the real value of these networks and the "social graphs" they create is in the gate-keeping function. "This suggests that the future of social networking will not be one big social graph, but instead myriad small communities on the Internet to replicate the millions that exist offline."

Many of the new, less popular but fast-growing companies with funny names offer to do just that - create user communities around communities of interest. As I've noted before, Virginia uses social graphs to increase its service delivery capacity by tapping people who need particular services to help one another.

In the uncertain times that follow a market top, financial advisers often remind clients to take a deep breath, revisit their strategy and rebalance their portfolio as needed. That's good counsel at the dawn of a new year because it helps recognize that (a) government may not be an early adopter, but it's not as late as many thought in implementing these practices; and (b) here at the beginning of the fifth decade of the open government movement, social networking and Web 2.0 collaboration are what people increasingly expect transparency to look and act like.


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