Thursday, October 31, 2013

Network Effects in Reverse: Facebook's Problem with Teens

Facebook spooked investors yesterday when it announced earnings.  Actually, profit levels themselves were not the problem.  Facebook reported robust financial results.  However, management informed investors that the number of teens visiting the site declined in this recent quarter.  What's happening?   I believe that teens are migrating to other social media sites, one of which Facebook now owns (Instagram).   I hear many parents of middle school and high school students noting that their kids are not asking first to join Facebook.  Instead, they are first asking to join Instagram or some other social media sites.   

Here's the potential bigger problem coming down the road for Facebook.  When you are growing as a social media site, you have network effects in your favor.  The more users on the site, the more value per each user - it's a virtuous cycle.    However, when the number of users begins to decline, you have the potential for a downward spiral to begin.  As someone's friends leave Facebook (or don't join in the first place), he or she derives less value from the platform.  Then that person defects perhaps.  Their friends now derive even less value from the site, and they may defect.  We've seen this story before, of course... just ask the folks at MySpace.  Now, I'm not predicting such a dramatic fall for Facebook, but I am suggesting that investors have a right to be worried about the drop in teen usage.  It will be an interesting metric to watch going forward.

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