By N. Dawar
Can a company built on the ideas of scale and network effects unbundle its offering into multiple brands and still thrive? Facebook is about to find out.
Unbundling has a compelling strategic and competitive rationale for Facebook. It has implications that extend far beyond the company’s stated goal to design single-purpose apps that fit mobile usage and the bottleneck of screen mobile device real estate. “Facebook is not one thing,” Mark Zuckerberg said in his recent interview in the New York Times. And clearly, the more meaningful things Facebook becomes to its customers, the less chance it has of being felled by a single savvy competitor or by the obsolescence of a single monolithic social network. But what will unbundling do to its sources of competitive advantage?
Observers have quickly labeled the strategy outlined by Zuckerberg, “The Great Unbundling.” And that captures part of the strategy: standalone, dedicated single-purpose apps will populate Facebook’s stable. They may or may not carry the Facebook brand. But unbundling is only part of the story. More interesting is what the strategy says about Facebook’s understanding of its future competitive advantage.
Today Facebook enjoys three advantages over rivals: technological capabilities, economies of scale in its infrastructure, and most importantly, network effects. Network effects favor Facebook because for those who want to socially network, it makes sense to congregate on Facebook where everybody else is hanging out. There is only one square in the global village, and it is run by Facebook. Being on a different square from everyone else doesn’t get you anywhere — you just miss the party. This makes Facebook’s competitive lead, with over a billion users, a self-reinforcing advantage: the more people that are on Facebook, the less reason newcomers have to not be on Facebook. So what effect does unbundling have on Facebook’s competitive advantage?
Zuckerberg appears to recognize that the Facebook brand as a single monolithic entry point cannot be everything social to all people. Users have different needs, and those needs will be served with separately branded products to deliver different experiences and attract and retain varied customer segments. Each brand, whether it is Facebook, Messenger, WhatsApp, or Instagram marks distinct territory in the social space. The strategic bet here is that a single customer interface is not necessary to maintain or even strengthen Facebook’s technological lead and infrastructure scale. You can have several customer brands and interfaces and still enjoy these back-end advantages. But what of network effects?
Could unbundling dismantle the network effects at the heart of Facebook? Not necessarily. First, brands that Facebook currently operates, Facebook, Messenger, WhatsApp and Instagram, have hundreds of millions of users, and each of them enjoys greater network effects than all but the largest potential rivals. Secondly, Facebook may believe it is worth sacrificing some network effects in order to build distinct brands and pre-emptively occupy social space. For example, more cohesive groups may have stronger inter-relationships, and so members may be less likely to leave to try other social networks. Finally, Facebook’s strategy suggests that it is well on its way to becoming a conglomerate that is in the business of managing businesses that have network effects at their core. Lessons learned from one network effects business translate to other network effects businesses — a benefit few of its rivals possess.
Above all, the new direction is a smart, competitive strategy even if it has been seen more as product and brand strategy. By having multiple brands in the marketplace, by preemptively building or acquiring new types of social space, by serving and defining multiple segments or “use cases,” and by experimenting with products and features such as Paper and Graph Search, the company both hedges competitive risk and stays ahead of customer needs. Get ready for the many faces of Facebook.