Parks Associates Blog

Wednesday, December 06, 2006

Why MySpace is Natural Monopoly

Economics teaches that the market for some goods and services are ‘natural’ monopolies. Take telephone service, for example. A telephone service is only really valuable if any person with a phone can be connected to any other person with a phone. For this reason the market with ‘naturally’ coalesce around a single, monopoly provider unless the government intervenes.

The Internet is another good example. I could (hypothetically) go out and create a new system for connecting computers together and maybe even convince a few friends of mine to use it but, unless it would interoperate with the system we refer to as the ‘Internet’ it would be of little value.

There are other examples, of course, electricity service, subway systems, roads, railway transportation, etc. etc. etc. I’m sure you get the general idea. My point is to highlight the (sometimes) overlooked fact that all of these have one thing in common: they are networks.

We are used to thinking of ‘natural’ monopolies as those requiring physical infrastructure but the same principles apply to cyber networks. One is ‘naturally’ better than two or more. Instant messaging, for example, would be improved if all of the software packages interoperated with each other. This would increase the level of competition, however, and so the major providers generally keep their IM programs closed to outsiders. The recently established interoperability agreement between Microsoft and Yahoo is merely a strategic move designed to give them an edge over AOL and Google.

Now in the case of instant messaging, multiple players have survived because the monopolistic ‘gain’ is relatively small. It is inconvenient to alternate between multiple IM programs but not terribly so. They are all available for ‘free’ and use little drive space. Users will therefore tolerate the inconvenience of multiple providers. But what about a peer-to-peer communication network that demanded a higher level of consumer ‘investment’?

Social networking, after all, is simply a peer-to-peer communication network. Users put information about themselves onto a webpage and then link it to pages made by acquaintances. The resulting online network replicates offline social connections and facilitates communication between the parties. The end result is simply a hyper-efficient enhancement to traditional word-of-mouth exchanges. Instead of getting together with friends and asking, “Has anybody heard how so-and-so is doing?”, social networkers can simply trace the online connections until (hopefully) they find the person in question and learn the latest.

MySpace is obviously the largest social network and its value, like any other network, grows as the number of users increases. It also grows as the amount of information it holds increases. (Finding your long lost friend’s page is pointless if it says nothing about them.) In other words social networks, unlike instant messaging, require a higher level of ‘investment’ from users. They must not only create a list of ‘friends’ but also spend time and energy providing information about themselves. Alternating between multiple social networking sites entails a greater cost than switching between instant messaging programs. Is the economic ‘gain’ of a single social network great enough to for the market to naturally eliminate all other rivals? Evidence suggests a rosy future for MySpace.

In August of 2006, Parks Associates fielded an online survey which found that among all of the key social networking services, only MySpace has a substantial base of unique users. Seventy percent of Yahoo! 360 users, for example, also use other social networking sites; MySpace in particular. Ditto for Facebook, MSN Spaces and Friendster. In other words, the people using MySpace’s competitors are generally MySpace users that have the time and energy to maintain a presence on multiple social networks. This presents an obvious, long-term business challenge to the competitors. If they cannot build up a large base of unique users, they will always be on MySpace’s periphery.

Social networks, like many other kinds of networks, are showing a tendency towards a monopolistic market equilibrium which almost by definition makes social networking a ‘natural’ monopoly. The implications of this conclusion are intriguing. Setting the side speculation of government intervention, the success of MySpace has produced a bumper crop of ‘me too’ sites backed by various venture capital firms. Yet economics suggests that even if the cost of having multiple networks is small, there will just a few major players in the end. Other sites will be condemned to niche markets and subsets while MySpace becomes the only site of significance similar to how Ebay (another good example of a cyber network) dominates the online auction space.

As the old adage goes, if it looks like a duck, walks like a duck and quacks like a duck, then you probably have a duck. MySpace is unquestionably a communication and information network which, like any other kind of network, grows in value with each additional user. Conversely the consumer ‘cost’ of using multiple social networks, while not as astronomical as having disparate telephone networks, is still higher than alternating between multiple instant messaging programs. All of this is to say MySpace looks like a natural monopoly and, judging from usage patterns, certainly appears to be behaving like a natural monopoly. I’m not a biologist but offhand, I’d say we’ve got a duck.


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