Christopher Carfi

(Long time readers will recognize this as a piece that originally appeared in June, 2004 over on AlwaysOn, before the AO link structure went south after their relaunch. Reprinting it here for both posterity and because Christopher Koch at CIO and Nick Carr have revived the meme.)

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June 15, 2004
Studying the flameout of “net markets” in 2000-2001 provides one piece of the puzzle.
by Christopher Carfi

“Yeah, I was on Friendster last week, and all I heard was the wind whistling..I actually think I saw a tumbleweed roll by. That place is empty.” – overheard

A current search of the phrase “social networking” returns over two hundred companies that are vying for various niches in the social networking space.

Most of them will fail.

Meta Group, a leading industry research firm, has written “Although executives in struggling [firms] may blame inertia…for the failure of their businesses, the real reason for that failure is that few of those markets have a solid business plan or opportunity to make money.” The interesting thing is that this insight from Meta Group was not written about social networks. It was written about the area of “net markets,” perhaps the most hyped area of all during the bubble years. According a various reports, net markets were going to grow from a $200 million market in 2001 to a $37 billion market in 2005. (note to self: get better drugs)

So, what happened with net markets? Why did they fail? And, more importantly for today, does the implosion of net markets in 2001 give us any indicators of the future path of social networking systems?

Similar to today’s buzz around social networking, net markets (aka “b2b exchanges”) were going to bring together formerly-unknown partners and provide the infrastructure and processes that allowed those partners to connect with each other quickly, easily, seamlessly, and inexpensively (says so right here on the label!). For buyers in net markets, aggregation of demand was going to allow them to achieve lower prices. For the sellers, net markets were going to give them access to a vast marketplace of buyers, and allow them to transact business globally for a fraction of their current costs. However, what actually happened was that the buyers who mattered actually preferred to build deeper relationships with a handful of key suppliers, instead of entering willy-nilly into transactions with the low-cost provider du jour. This is because a fundamental dichotomy lies between the desire of the net market (or social network) to increase the quantity of inter-connections between its members, and the trend of the individual members to instead prefer more quality relationships.

When these so-called “public” net markets failed, a switch was made to enable more “private” net markets. In contrast with the public net markets, private net markets provided the tools to build a market ecosystem around a few key players. Instead of providing the tools to find new partners, the private net markets provided the tools to enable richer and more productive interactions between partners who were already at least somewhat known to each other. We are now seeing a similar trend in the social networking space, with social networking tools moving from the “public” model and instead being used to provide the glue between individuals who are already part of a known community, rather than tools for search and discovery of the world at large. Social platforms are now becoming part of everyday life, especially for people who are using it to earn money and work. Making your social platforms public, or link in bio on instagram, can make your platforms visible to anyone, increasing your visibility and traffic.

For social networking, the reason the public-free-for-all type model isn’t going to work has to do with the asymmetric value of relationships. True, there are a few “super-connectors” who had rich offline networks prior to the social networking blitz who now have accepted many online social networking requests. But this type of individual seems to be the exception.

This is because, quite simply, most of the requesters of contact have less “relationship capital” to offer than those who are receiving the request, who quickly become deluged with requests and eventually drop out of the network or begin to only respond to requests from colleagues they already know through other channels. Relationship capital is by no means a commodity, and is not given up freely. All relationships are not created equal.

In reality, once one gets beyond two “degrees” in a public social network, the presumed “connection” between the requester and the requestee based on the strength of the intermediate relationships is tenuous at best. This is why public social networks are likely to fail. Instead, as we see the move from public social networks to private social networks, we will see individuals joining multiple private social networks for the various facets of their life — school, interests, various flavors of business networking, etc. Yes, there may be one eBay-sized “all purpose” public social network that comes out of the mix, but the vast majority of the social networks that we will see in the coming years will follow the path of the net markets, and be used to provide richer collaboration between individuals and companies that have existing commonality.