I think TWTR illustrates how difficult it can be for the losers in a market dominated by network effects. Looking at their respective user bases, you would say "hey, FB's user base is only 6 times that of TWTR!" But from a network value perspective, you're looking at:
V(FB) = 2.2B^2 = 5*10^18
V(TWTR) = 1*10^17
V(FB)/ V(TWTR) = 50X
Referring to the impairment of intrinsic value at Cap Cities/ Buffalo News/ Washington Post, Buffett remarked:
Until recently, media properties possessed the three characteristics of a franchise and consequently could both price aggressively and be managed loosely. Now, however, consumers looking for information and entertainment (their primary interest being the latter) enjoy greatly broadened choices as to where to find them. Unfortunately, demand can’t expand in response to this new supply: 500 million American eyeballs and a 24-hour day are all that’s available. The result is that competition has intensified, markets have fragmented, and the media industry has lost some—though far from all—of its franchise strength.
Since TWTR and FB have overlapping user bases, you can't directly compare the standalone to the integrated value of TWTR via Metcalfe's law. But there is unquestionably content on TWTR that would be more valuable as part of an integrated environment. Since FB is getting browbeaten for political content, I can't see it being in their near-term interest to buy TWTR. Leaving political content aside, I think FB has total optionality on whether to let TWTR shrivel up and die or buy it. Ultimately, all that content will migrate over to Facebook anyway.
The same thing is happening with LinkedIn, although in their case MSFT was stupid enough to buy them first. Counter-intuitive though it seems, there can be only one social network. |
