Facebook vs. MySpace

Interesting article on PCPro observing that Facebook has just surpassed MySpace in monthly uniques.

(Murdoch Fumes as Facebook Overtakes MySpace)

Perhaps this should be marked as a cross-over point in market structure reminiscent of the "serial monopoly" or "serial oligopoly" that often observed in emerging marketplaces where network effects provide significant value to the network users. Think of instant messaging, search marketing; or for older readers, PC-based word processing or spreadsheet software.

Or maybe its just that online social networks are starting to mirror social networks in that other, real, world. They may eventually consist of a small durable and evolving core of networks (plural) surrounded by a busy swirl of transitory, largely inconsequential interactions whose importance and permanence diminish quickly with distance and time.

Note that I wrote, "...small, durable core of networks". In the real world, most people maintain multiple, distinct social networks. And these may be overlapping or mutually exclusive or something in between. For example, colleagues at a new job vs. college drinking buddies. Facebook and MySpace both operate on the dubious assumption that what I'm willing to share with my college drinking buddies should also be shared with prospective employers, my local pastor and Aunt Millie.

Also, social networks in the real world rarely grow indefinitely and infinitely large. Maintaining relationships in the real world requires an expenditure of effort, which puts an upper limit on effective network size. As we move through the paces of our lives, we often prune the outer, less intimate branches of our social networks. On the internet, it's easy to "add a friend" and the maintenance costs (a little storage at pennies per gigabyte) are low and getting lower. But there is almost certainly an inverse relationship between the value of (personal) information shared on a social network and the size of the audience, which ultimately is a negative network effect. And sometimes it's even more important to prune the most intimate branches of one's social network... that's why ex-boyfriends and girlfriends are rarely invited to weddings.

Before a winner is declared in the social networking arena, a great deal of evolution in the product offering (and of course the business model) will likely occur, and it's probably way, way too early to declare one of the today's leaders the inevitable champion. Also, keep in mind that any discussion of MySpace vs. Facebook will probably sound parochial to tens of millions of social networkers in China.

Many, if not most, observers thought "Internet Search" was over after Yahoo emerged as the dominant portal versus its contemporary challengers -- Excite, Lycos, InfoSeek and AltaVista -- while Google's founders were still working on their doctorates.

In five years, a debate about the dominance of Facebook vs. MySpace may be as quaint as a discussion today about whether Yahoo's home page index of the web was preferable to AltaVista's search engine or whether Multimate or WordPro was the best PC word processing software in 1985.

Updates

2009-12-17 - The Financial Times has a nice epilogue on MySpace

2010-10-17 The NYT has a nice article about dual profiles on Facebook. I love the irony of friends emailing each other (that's so 2005!) to get permission to post vacation photos on Facebook.

What Was Merrill Lynch Thinking?

According to an October 25, 2007 Wall Street Journal article

(Pioneer Helped Merrill Move Into CDOs - subscription required)

Merrill Lynch underwrote $160 billion of CDOs from 2000 through 2007 year-to-date. Assuming Merrill earned an average underwriting spread of 1.25% on this business, they booked $2.0 billion in underwriting fees over these 7 1/2 years. Those are some pretty good numbers even by investment banking standards. And with investment banking compensation at 45-50% of revenue, you can assume Merrill's CDO desk took home some pretty handsome paychecks over the years.

Now Merrill is taking a nearly $8 billion writedown on CDO inventory that they warehoused and couldn't sell. Some think the number will go even higher in the current quarter ending December. At the moment, it would appear that Merrill's approach to CDO underwriting was driven more by league table bragging rights, quarterly profit targets and perhaps a compensation system that ultimately failed to tax the CDO underwriting group with an appropriate capital charge for the risks they took with the firm's money. Ultimately, Merrill was buying the securities it packaged. This looks less like a failure of risk-management systems than a complete lack of one.

To be fair, the development of CDO's helped provide the abundant liquidity that enabled private-equity firms to buy out companies, which in turn, has helped prop up the equity markets. And Merrill seems to have done quite well in its M&A advisory, brokerage and other underwriting activities. So the CDO underwriting business may have contributed directly and indirectly to Merrill's success in other lines of business, mitigating the pain somewhat. Ironically, Merrill seems to have managed its exposure to leveraged finance commitments remarkably well, making the CDO debacle even more puzzling.

More to come on this one.

An old article I co-authored with some interesting data on Yahoo, Lycos, Infoseek and Excite

Private Capital and Public Markets