Bubble, or just the beginning of social networking?

Talk of there being a bubble in Web 2.0 is fairly widespread now. Years of growth, both in startups and investment have fulled the sector to some levels reminiscent of the first web boom. Arguably far too many companies are chasing the same market, and inevitably many will fail. And yet are we really in a bubble, or are we only just at the beginning of the second great internet boom, led by social networks?

Facebook and MySpace

According to Facebook, as of this minute, they have 28,712,820 registered users in the United States. The population of the United States today is approx 303 million people. Less than 1 in 10 people in the United States has a Facebook account.

I couldn’t find a solid United States figure for MySpace, but Fox News reports 110 million active users a month logging into the service globally. Even if every single one of those users were in the United States, the figure is only slightly higher than 1 person in 3.

Not everyone in the United States is online, even in 2008. Recent figures show 223 million online. Less than 1 in 5 people online use Facebook, and slightly more than 1 in 5 use MySpace.

We do know that MySpace is more popular than Facebook in the United States, but even presuming MySapce has 50million users and combined that number is 80 million, less than half of all people online use the two most popular services. Notably those figures don’t allow for overlap, and many MySpace users would be on Facebook as well, so the actual penetration is significantly less.

Yesterday and today

Demand in 1998, the start of the first web boom, is very different to demand in 2008. In May 1998 there were 44 million internet users in the United States compared to 223 million today. Conversely the cost of online participation has shifted towards free where many of the bubble 1.0 companies focused on traditional commerce that required sales to be successful. It costs to get online, but it costs nothing to use a service like MySpace or Facebook.

And yet, less than one in five people use Facebook.

Undiscovered users

There’s a very logical reason why hundred of millions of dollars have been invested in Facebook. Those investing the money know that the potential market for Facebook is the other four in five users who haven’t signed up yet. We may have seen MySpace start to peak at around 110 million users, but Facebook has a world of potential ahead of it. And new users are signing up every day. In November 2007, Facebook had 19.9 million users in the United States vs 28.7 million today.

Social networking growth doesn’t necessarily follow the established norms. The concept of demand in social networking is fluid, and unmet demand doesn’t apply because those who don’t currently use Facebook currently don’t believe that they need to sign up, and yet millions or new users sign up every month. In marketing we create needs where they have been none before, and in social networking the created need comes not through traditional marketing, but via word of mouth. My wife has only just signed up for a Facebook account, and she only did so because her work friends kept telling her that she should (I’d been trying for years without success). In a high school it may be labeled peer pressure, but viral word of mouth in social networking creates new users where there was no unmet need before.

This sort of growth never lasts forever, but ultimately for Facebook, and any other new service, it comes down to numbers. Facebook sells itself as a service into a market where despite widespread publicity and public knowledge, over 80% of people don’t use it. As long as there are potential users there is potential growth. As long as huge numbers of people aren’t participating in social networking, there is potential growth. We may see more bubble like failures in the coming year, not helped at the financial crisis in the United States, but as long as penetration is low, social networking will never truly be in a full blown bubble. We are, in user numbers, just at the beginning in the social networking space.