Social Networks Are the New Web Portals

Social networks like Facebook and MySpace are becoming the new gateways to the Web, threatening the dominance of Google, Yahoo, MSN, and AOL

By Jeffrey F. Rayport

Not long ago, it seemed that four companies would forever dominate the Web in traffic and ad dollars. Each of the Big Four—Google (GOOG), Yahoo! (YHOO), Microsoft's (MSFT) MSN, and Time Warner's (TWX) AOL—attracts more than 100 million unique visitors a month. Collectively the group accounts for roughly 90% of gross ad dollars online. So far, so good.

But now those companies are facing a threat to their dominance. I'm not talking about the recessionary headwinds that have slowed growth even for mighty Google. Nor is this about the self-inflicted wounds that have weakened the positions of the other three players. Yahoo spent the last year in turmoil following Microsoft's takeover offer, inducing Carl Icahn to elbow his way onto the board and then force out CEO Jerry Yang as business conditions grew increasingly dire. AOL is hardly better off. Its former CEO, Jonathan Miller, freely admits that AOL essentially missed the boat on social media and the decline of AOL's legacy connectivity business. Microsoft failed to acquire Yahoo and continues in vain to seek a credible competitive response to Google's search advertising juggernaut.

These travails aside, there are bigger threats on the landscape. Today's massive social networking systems are rapidly becoming Webs within the Web—one-stop shops for a wide range of services (from content to communications to commerce) that were once the unique province of the Big Four.

One-Stop Shopping at Facebook

For example, through a combination of its own creation and that of third-party developers, Facebook has become a world unto itself. Now the Web's largest social network as measured by active users (140 million at yearend 2008), Facebook offers bread-and-butter portal services like e-mail and instant messaging as well as photo posting and video sharing. But Facebook's reality extends much further. A partnership with Amazon.com (AMZN) has produced a shopping application that lets users buy items at Amazon without leaving Facebook's site, while tapping opt-in "news feeds" that broadcast activities on Amazon, such as product reviews and wish list updates, to Facebook friends. At the same time, a chat feature introduced last spring, which automatically populates itself with a user's Facebook "friends," may render older services like AOL's AIM (where new users must build their own "buddy lists") socially impoverished.

Facebook's mobile alerts, long familiar to the site's users, are just the tip of the iceberg in wireless apps, as the company delivers mobile services for plain-vanilla cell phones and more sophisticated smartphones. Applications for popular devices, such as Apple's (AAPL) iPhone or Research In Motion's (RIMM) BlackBerry, deliver even richer social experiences. Video has taken off, too, with 45 million clips uploaded on Facebook to date; last month, the site also introduced higher-resolution video formats. Facebook users can send video messages from the site and from mobiles.