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Shovels As A Service In The Social Networking Gold Rush

For this week's feature on Web 2.0 in the enterprise, we counted 17 startups that offer social networking platforms. I don't mean social networking sites (there are thousands of those), but companies touting technology for the FaceBook and MySpace wannabes.

Everyone knows that selling picks and shovels is the surest way to get rich during a gold rush, so these companies could be on to something – or at least, they would be if so many hadn't come up with the same idea. The difference is that in keeping with the Web 2.0 fashion for online apps, most have set themselves up as Web-based service providers. Not so much selling shovels as renting them.

A service-based business model is great from the vendors' (or service-providers') point of view: It means they only need to make a sale once and can get paid over and over again. It's even better when the marginal cost of actually providing the service is close to zero.

Most important during a gold rush, it expands the market, thanks to lower costs of entry. (And compared with any other kind of media business, running a social networking site already has ridiculously low costs.) Renting is cheaper in the short term than buying, which attracts a lot more prospectors hoping to found a data mine. That means a lot more sites, all competing with each other and with traditional publishers for the same users and ad revenue.

I don't think all the startups are doomed. Many also offer other Web 2.0 technologies such as wikis, and some target behind-the-firewall intranets rather than public Web sites. But when the inevitable bust comes, pure-play social networking platforms could find that just one degree of separation from Bubble 2.0 isn't enough. The company that lost the most market cap in the first Internet crash wasn't Enron or WorldCom or Pets.com. It was Cisco, the king of the picks-and-shovels crowd.

In the long term, social networking is becoming a standard feature of most large Web sites, not an end in itself. I think this is behind Google's relative lack of interest in the space, as well as Facebook's API and push to become a host for third-party apps. On the intranet, where requirements are slightly different (assuming that intra-corporate social networking is useful at all, which it might not be), the startups face competition from bigger vendors such as IBM and BEA. It's a feature, not a product.

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