A New York Times article in Sunday's editions highlighted smaller, niche social networks that gave people more control over their privacy when compared to the giants such as Facebook, Google+ and Twitter. The article reviewed Path (for sharing with a small group of people), FamilyLeaf (for sharing with family members only) and Pair (for sharing with one other person).
These networks, and hundreds of others like them, fill an obvious void that the big three social networks are missing. The question is whether that void is big enough to justify revenues that will allow all of these lesser social networks to survive.
Some will undoubtedly fail. Others will follow Instagram and win the merger lottery, getting scooped up by a bigger company. What seems less likely to either of those options, however, is that the smaller niche social networks will continue as independent firms.
"In the early days of the auto industry, there were thousands of car companies. Just a few survived. But those few became business giants," said Amy Bruckman, professor in the School of Interactive Computing at Georgia Institute of Technology. "The [social media] boom is no different. There will be a few big winners, and lots of losers."
But Bruckman warns that most small startups will not be as lucky as Instagram: Most will ultimately fail.
"I don't anticipate as much consolidation as took place in the auto industry - there's room for more winners than that. But there are going to be a lot of losers," Bruckman said. "It seems obvious that companies like Google and Amazon know how to turn a profit. It's also obvious that companies already on their way out like Ning don't."
Bruckman doesn't like the term "social media bubble" for what is happening now, nor does she like dot-com bubble for what happened in the late 1990s.
"I'd call it natural selection," she said.
The Network Effect
Angelo Sotira, CEO of the online artists' community deviantART.com says the $1 billion Facebook paid for Instagram is a result of Instagram's ability to create a so-called "network effect."
"All of these types of startups sit on a petri dish attempting to achieve this effect," Sotira said. "Instagram will hit 100 million users by the end of the year. Any company that can do that is worth $1 billion to Facebook, Google or Microsoft from a threat analysis alone."
Traditional investors, however, may not understand that kind of thinking which, in turn, may give rise to their willingness to throw the "bubble" label on the entire social media sector.
"This is hard to understand for most investors, so there's going to be some dumb money floating around the photo-sharing space," Sotira said. "The real value is in any company that can grow rapidly out of that petri dish to achieve network effect. If you can do that, you get a billion bucks.
"Go ahead and try," he added. "Bottom line: Instagram is a gem worth every penny on that battlefield."
Facebook Is Big Enough to Make Some Mistakes
Even if Facebook did overpay for Instagram, it's probably not a big enough deal to do lasting damage to the company. As we interviewed experts about the social media bubble, we kept hearing the word "scalability."
"If Facebook has one advantage that could possibly make its own 'go-fever' a little less destructive, it is unique in its ability to bring unparalleled scalability to the table of its acquisitions," said Mike Seiman, CEO of CPX Interactive, a digital advertising company. "No one doubts that it likely overpaid for Instagram in what seems to be an impulsive move, but if anyone can use scale to elevate a potential contender into the next Facebook... perhaps it is Facebook."
Coming Tomorrow: Fear and Speculation Drove Facebook's Instagram Buy
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