Tuesday, May 22, 2018

Critical Mass - Why Facebook Succeeded and Google Plus Failed

Once you have a critical mass of users, many other things follow.

I was on Google Plus the other day, just out of curiosity as to what it was.   If you use a Google (or what they call "Alphabet" - something else that never took off) product, you are automatically assigned a Google Plus account, whether you like it or not.   This, of course, pissed a lot of people off by itself.   But you'd think that Google being the biggest thing on the Internet, they would have billions of Google Plus users, and would decimate Facebook in a matter of months.

Think again, of course.

The problem with social networking, is that in order for a site to work, you need a critical mass of people on the site.   If only a tiny minority of folks are on the site, then no one else will want to join it - not if there is an alternative that already has achieved critical mass.  Thus, Facebook could be a lot crummier than Google Plus and it really doesn't matter - they have the critical mass, and unless a mass-defection takes place (very unlikely, as recent events illustrate), Google Plus doesn't stand a chance.

Yet Facebook took off where MySpace failed.  Why?  Well, simply put, Facebook got its foot in the door early enough before MySpace achieved critical mass.  MySpace was an interesting site, but they went commercial too quickly, and then kept changing the format of the site too early on, to the point where people didn't feel they had a commitment to the site.  It wasn't essential to daily living as some people perceive Facebook to be.  People were already leaving MySpace in droves (I got bored with it pretty fast) and Facebook was in the Right Place at the Right Time to take on these users, as well as a far greater number who were just discovering what "social networking" was all about.

Critical mass is the theory behind most of these silicon valley startups.  The idea is, you can hemorrhage cash for months or years, but in the interim, you are building up a loyal following and becoming a de facto go-to place on the Internet.   Pretty soon, you are an institution, like Google, and you can do whatever the hell you want to do, and likely not piss off too many people.  Oh, the early days of the Internet!   Remember when Google's slogan was "Don't be evil?"   Ha-ha, that didn't last too long!

Back then, Google was the scrappy start-up, and Microsoft, who made operating systems, was the big, bad, 600-lb gorilla in the marketplace - the IBM of the 1990's - the company we all loved to hate - the "evil" that Google was against.  Today?   Well, Windows is still around, but smart phones and tablets are the thing, not PCs, and Microsoft flubbed music players, smart phones, and, well, just about everything that wasn't Windows.

But Microsoft got to be where it is because of critical mass.  Once the IBM-PC became a de facto industry standard for personal computers - wiping a motley collection of wanna-be PCs off the map - even the Apple II - Microsoft found itself with a virtual monopoly on operating systems, and then started printing money.  The trick then, of course was to stay in that position of monopoly power, which is why they spent the time and money developing Windows copying windows from Xerox PARC.

But Microsoft missed the Internet.  Concentrating on operating systems, they didn't pay attention to what became the next big thing, and in fact, what most computing devices are used for today - accessing the Internet.   Late in the game, they got into Internet Explorer, and made it part and parcel of Windows, virtually wiping out Netscape Navigator.  But most folks today use Chrome or Firefox, in spite of IE.   Microsoft is into the cloud, of course - renting you software over the Internet these days, instead of letting you buy it once and use it (that would be no fun, right?).

But the world moved on, and social networking and other Internet-related activities are now the next big thing - and Microsoft really doesn't have much room for rapid growth at this point.

Apple - after losing the PC wars, firing Steve Jobs, and nearly going bust, is now the media's darling. And the critical mass thing they have, for the time being, is the iPhone and iPad.  The problem for Apple though, is that there is no "Moat" around their products.  The iPhone has a large market share in the USA, but worldwide, is a minority player.  And quite frankly, the competition is so much cheaper and easier to use, it is hard to see how they can build a "moat" or maintain it for very long.

Oh, sure, if you buy into Apple, they try to rope you into their "ecosystem" - getting you to buy an iPad to go with your iPhone, and an Applewatch, an iMac, or maybe an AppleTV.   The problem for Apple is, their products bundle hardware with software, and when you buy an Apple product, the price is easily double - sometimes as much as ten times - as much as the competing brands.   And as Facebook has illustrated, the real money isn't in selling hardware or even software, but in online services.   And maybe that is where Apple will build its next moat - in Applepay or other services they can sell online.

The problem with critical mass is that many of these silicon valley companies never achieve it, and some never will, as low-cost competition will always be around.   The related problem is that some companies never achieve it before they run out of capital to squander.   Elon Musk could end up the richest guy in the world - or bankrupt - depending on whether he can build and sell enough Model-3 sedans (sedans? how quaint!) before he runs out of capital.  Other companies, like Twitter, have become institutions - but have yet to make money.   Even Facebook faced this problem early on - but seems to have it largely licked.  Of course, Facebook is now facing a whole host of new problems, caused by their whoring of their users to some pretty odious Russian pimps.   Fighting that is going to cost them money.  But of course, despite all the hue and cry from users, Facebook activity has actually risen since the Cambridge Analytica fiasco.
"Hey, we're selling your most personal data to Russian oligarchs and other shady people, who are using it to manipulate you and program your mind!"
"Still have cute cat videos?" 
"No prob!"
Once you have that  critical mass, you can shit all over your customers.

Up to a point.

I mentioned IBM in the context of the IBM-PC, a product we all thought at the time would allow IBM to "take over the world" for good.  They already had a monopoly in the computer business (you had IBM or some crappy off-brand, period) and many us hobbyist computer geeks in the pre-PC days were concerned that the IBM-PC would result in the personal computer turning corporate.  It did, of course, but the corporation was Microsoft, not IBM.   Who saw that coming?  Even Bill Gates was taken by surprise.

So these "moats" can be drained over time - and sometimes in a real hurry.   Other times, it may take decades.   When I went to work for GM, we had a majority share of the US car market.   Today, GM has survived bankruptcy and no longer has the dominant market share it once had - except in China.  How times have changed.   And what changed was an energy crises and the price of gas going through the roof as a result of the Arab Oil Embargo of 1973.

GM thought they could tell us what to buy, but when an alternative came on the scene - funny little Japanese cars that got good gas mileage and actually cost less than US cars - people started to migrate away.  A trickle at first, then a flood.  Today, the Japanese charge more for their vehicles than US makers, in most cases, because they are viewed as better products.  GM has to sell on price point, in many instances - which is why they (and Ford and Chrysler) are largely abandoning the car market in favor of SUVs and trucks.  People still buy cars, just not "American" cars.  Trucks and SUVs can't be far behind, can they?

But the Japanese are finding themselves outwitted by the Koreans - and the Chinese and Indians next.  Again, it started with a trickle, then a flood.  Who's next?  Maybe GM will someday clean their clock.  But then again, given how history is, once a company loses that critical mass, it is damn hard to get it back.  Apple had critical mass with the Apple II, until the IBM-PC hit the scene.  It took a whole new product line - iPads and iPhones - to get that critical mass back again.

Warren Buffett likes to opine that he invests in companies that have "moats" to prevent competition.  Companies that already have this critical mass - large enough in a given market that no one will bother to start a competing business.  A lot of folks scratched their heads when he bought up small-town newspapers.   But it is a typical Buffett move - buying something that is basically a monopoly at this point.   In every town, all the newspapers (and in days gone by, there were usually several) have gone bankrupt or consolidated.   Syracuse used to have the Herald, the Journal, the Post, and the Standard - among others.   Today it is the Syracuse Herald-Journal/Post-Standard.  And the same is true in other small towns.   And who in their right mind would start a newspaper today? 

So they can keep cranking out crappy, second-rate newspapers, and a lot of people keep buying them.  There still needs to be a "paper of record" where the governments (and individuals) can post legal notices and whatnot.  In fact, our local paper here has little else but.  Legal notices is one of their largest and most profitable advertisers.   Moats!

I am not sure what the point of all of this is, other than to observe that the model of critical mass can work, and it can prop up crappy companies and crappy products for a long, long time.   But eventually, every company that lives behind a moat has its comeuppance.   The railroads were once perceived as invincible, and had a "moat" and critical mass that seemed insurmountable.  But the automobile, and later on, the jetliner, replaced the train as the primary means of mechanized transport in the USA and indeed, the world.  You can only hide behind a moat for so long.

And the reason for this is, I think, that people hate monopolies and will flock to the next big thing, as soon as it looks viable and has a critical mass of its own.   I noted before that people who pine for the days of trolleys are nostalgic idiots.   No one liked the monopoly of the trolley when it was around.  People couldn't wait to get their own cars.   GM and Firestone didn't "destroy" the LA trolley system to sell more cars and buses - they bought it for a song because people were already migrating away from trolleys, and buses were far less costly to operate, as they required no tracks.

Similarly, people hate their cable companies - they are one of the most reviled institutions on the planet.   Folks are "cord-cutting" and moving on to new technologies such as streaming not just as some sort of fad, but because they are running away from a monopoly that has become too complacent and too willing to sell a substandard product (moronic television shows loaded with almost 50% commercials).  And sadly for the cable people, there already is a critical mass in the streaming business. The best they can hope for is to sell people internet services over their antiquated coaxial lines.

Yes, this trend took decades to occur - and cable is by no means "dead" yet by any measure.  But the writing is on the wall.  Once you've gone to a streaming model and picked the programs you want to watch when you want to watch, with either few commercials or commercial-free, you aren't about to go back to watching what is on when they say it is on, interrupted by five minutes of commercials for every five minutes of programming.  It is, in fact, painful to watch, once you've been off the leash.

It would be akin to trying to be content with a slow-moving trolley, making stops along the way, when you've tasted the freedom of zooming by in your automobile, going where you want, when you want, a lot faster than a trolley.  You aren't about to go back.

And who knows?  Maybe these self-driving cars will be the next thing beyond that.   Once you've stopped owning a car and instead hail one on your phone, maybe the idea of everyone owning a car will be obsolete.   And maybe this is already happening in some places, with services like Uber and Lyft - both of which have critical mass, but are not making money - yet.   Many folks in larger cities are giving up cars entirely and reporting that the freedom of not owning a car is liberating.   For the annual cost of owning a car - even a "paid-for" car - you can hail a lot of Uber rides.

But critical mass has other applications - even for small businesses.   On our little island, vistorship was down - way down - about ten years ago.  As a result, none of the hotels or restaurants were making money.  Many would shut down, halfway through the dinner hour, as there were no customers whatsoever.   If you are going to serve things like raw oysters, you'd better be prepared to throw away a lot of oysters, or have a  critical mass of people to support such a restaurant.   Today, with new hotels and new homes being built - and vistorship up - we can support more restaurants, although it is still a challenge to get help (again, a critical mass of employable and skilled people need to be present!).   But we are far better off than before - despite what the naysayers always say.

So, if you decide to open a business, ask yourself whether you have this critical mass of customers and employees, in order to make it work.  Without either, you'll go broke.  It is like the sad little shops that open up in Lansing, New York, trying to sell coffee or Nascar collectibles, or ice cream - without doing research first to see whether there is a clientele for these things.  You can't just open up a cents shop and hope people come.   It is a sure way to go broke.