Wednesday, April 13, 2005

Social Networking & Classified Ads

Just in case you’re taking the SAT exam soon, remember this: social networking is to classified ads like peanut butter is to chocolate. The two complement each other so well, that it is one of those fabled 1+1=3 combinations (don’t use that in the SATs). Basically, the two need each other.

Social networking, as brought to us by Friendster, has been looking for the killer application to give it a raison d'être. Social networking is a powerful engine for generating large numbers of users and for developing a sense of trust and community, but it needs an application to turn that burgeoning community into a fountain of value.

Having used a number of social networking websites, I register, create links to people, use it for a while and then realize that it is devoid of any lasting value. Websites must provide a compelling and dynamic environment, above and beyond developing a social network, in order to maintain the ongoing interest of its users. Social networking needs a killer application with a sustainable business model.

We’ve seen social networking companies try applications like dating, gaming, photo sharing and social networking for its own sake. Are classified ads the perfect match for social networking? Absolutely.

Classified ads benefit from the law of increasing returns or Metcalfe’s Law, which states that the value of a network increases according to the square of the number of users. The more visitors a classified ad website gets the more appealing it is to post ads. The more users who post ads, the more appealing the site is to users. The more appealing the site is to users, the more visitors it gets…and the cycle feeds upon itself. This is also known as the virtuous cycle and it is the engine behind every successful technology company from Microsoft to eBay.

Classified ad websites need something to turn the crank, or initiate the virtuous cycle, and this is what social networking provides. Without social networking to jump start the virtuous cycle, a new classified ad website would have to spend millions or tens of millions to generate the critical mass needed to develop sufficiently liquidity and value to users. With social networking it can achieve that liquidity on a shoestring…until, of course, social networking becomes a common component of most commercial websites (see my next post). A good example of the marriage of social networking and classified ads (Friendster meets Craigslist) is