The future of Facebook

With 400 million users, will the social networking service end up eating itself?
Is Facebook now "too big to fail"? I don't mean in the sense that the taxpayer would have to pick up the pieces if it went under, but in the sense that the social networking service has achieved a position of such dominance in the online ecosystem that its eclipse is unthinkable. Is Facebook, in other words, the next Microsoft or Google?

The question is prompted by a couple of milestones recently passed by Facebook. The first is that it now has more than 400 million members. The second is industry gossip predicting that its revenues for 2010 will exceed a billion dollars. Other straws in the wind are estimates of the size of the "Facebook economy ie the ecosystem of applications, services and products that has evolved around the service; and the moral panics it now triggers in the mainstream media a sure sign that they fear a competitor.

In the real world, if an enterprise a bank, say becomes "too big to fail", then that's a failure of regulation because it means that normal competitive forces have been disabled. A capitalist economy can't function efficiently if enterprises are immune from the consequences of their mistakes. That's the "moral hazard" that the Governor of the Bank of England was so keen to avoid when the banking crisis first broke.

In the online world, the pressure exerted by network effects  ie the way the value of a product or service increases in direct proportion to the number of people who use it  constantly threatens to produce winner-takes-all outcomes. It's one of the paradoxes of networking technology that the aggregation of billions of free choices made by millions of free agents can lead inexorably to the emergence of a single, monopolistic behemoth. We saw that with Microsoft's dominance in the operating systems and office software markets; we saw it again with Google's dominance of the market for search and query-based advertising. Are we now seeing it with Facebook in the social networking sphere?

History suggests not. In the world of technology even giants can stumble  or fail. Once upon a time AOL was the reigning online behemoth. At its peak in the 1990s it had 30 million paying subscribers (which at the time was a significant proportion of the online population in the US and Europe) and thought itself big enough to take over Time Warner. There was even a schmaltzy movie You've Got Mail based around its email service. Now it's a business-school case study in hubris.

AOL was also a study in corporate strategy from which the Facebook founders learned avidly. Initially they conceived of their service as an AOL-type "walled garden which implied trying to keep subscribers inside that controlled space. If one of your Facebook friends sent you a message then you had to be logged in to read it.

When the irritations of that became apparent, the Facebook server began sending messages to your normal email account telling you that your friends had posted messages but you still had to log in to read them. Now you can reply to the messages from inside your usual email system.

By gradually breaching their walled garden, the Facebook founders have managed to avoid the fate of AOL so far. Their boldest move was the launch of Facebook Connect which allows external services like Twitter to interact directly with subscribers' Facebook accounts. What this means is that people can interact with their Facebook friends without being logged in to the site. This has triggered an avalanche of development as companies strive to cash in on the network effects of such a large subscriber base. The metamorphosis of Facebook into a platform on which other people do interesting stuff was not just a smart move; it was also a necessary one, because social "networking" is intrinsically self-limiting. If you have too few friends then people think you're a loser; but if you have too many, they think you're either a social slut or a self-publicist. As we know from the anthropologist Robin Dunbar see My Bright Idea, page 26 the cognitive capacity of the primate brain limits the size of the social network that an individual can develop. Last year a study by Facebook's in-house sociologist calculated that the average number of friends in a Facebook network is 120. And when it comes to real, intensive interaction, that number shrinks dramatically. It turns out that the average Facebook male interacts with only four people and the average female with six.

So if Facebook is to continue to grow, then it needs something more than social networking to sustain it. We are, in the end, just naked apes. Becoming a platform will keep it going for the time being. But it won't make it too big to fail. If you doubt that, just ask AOL.

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