Seeking Alpha
Profile| Send Message|
( followers)

Although Facebook (NASDAQ:FB) is a topic that has been covered ad nauseum here over the last couple of weeks, I still have yet to see an article focus on the real value of Facebook purely as a network and the ability of network effects to shape outcomes. I feel that this is Facebook's real strategy and its real inherent value.

Facebook is so relevant and attractive because it has such a powerful positive network façade. This can be reflected in its clever design to only be able to 'like' and not 'dislike' something on its platform. It has invaded every aspect of advertising. "Like us on Facebook" has become the new catch phrase. Even more creative was their "Connect" program allowing users to quickly share pertinent or personally relevant information directly on their own social media platforms.

In contrast to some of its large competitors like Google (NASDAQ:GOOG), Facebook is a product whose effectiveness is directly correlated to the amount of people who are using it--and lots of people are using it. Facebook now has around 900 million users, and they average 20 minutes of use per day.

If I were Google, I would be increasingly worried about Facebook. Google has already tried to take on Facebook and have lost, and have almost zero chance of catching up in the social network space. When Google took its first real shot at Facebook with Google Plus, it had immense financial resources and a number of specific internet assets it could harness.

Bottom line it was pretty well thought out. Yet, still, Google Plus didn't come anywhere near posing a serious threat to Facebook. And it's not clear to me what Google could have done that would have led to a much better outcome.

I believe Facebook has something that Google Plus does not: critical mass. As much as I would like to switch from Facebook to Google Plus, the fact remains that it is a dark and desolate platform compared to Facebook.

Facebook's creative genius saw early on the potential in partnering with other companies to develop apps for its platform. This in turn created another kind of positive network externality, more akin to the externalities that operating systems like Windows or iOS or Android enjoy: the more users the network has, the more apps it will offer.

People who get disenchanted with Facebook have nowhere else to go unless they want to move to a much smaller network--which, thanks to the logic of network externalities, is a less valuable network, a network they're not inclined to move to.

It's certainly possible that some unimagined "disruptive" technology could undermine Facebook. And I realize that it's inherent in the nature of disruptive technologies that not many people see them coming. Still, I'd take the disruption prospect more seriously if someone could get give me a plausible, step by step scenario in which an aspiring rival--even a very well-financed rival that already has valuable assets on the web--could successfully invade Facebook's turf.

Conclusion

The truth is Facebook already knows a LOT about you: what you like, what you spend your time doing, your friends, what your friends like, whether you like playing games, whether you share photos, music, recommendations, etc.

Facebook could, and I think it eventually will, establish Facebook Adsense, which I believe will be able to deliver much more relevant advertising than Google Adsense. It will be page contextual, but also social contextual. THIS is where Facebook will start making massive amounts of money.

Disclosure: I am long FB.

Source: The Inherent Value Of Facebook