World of Warcraft (WoW) as a Social Network

As reported on Yahoo Games (PluggedIn Blog) earlier this week, Activision Blizzard shocked the gaming industry by announcing that it has seen a 5% reduction in number of subscriptions in the previous quarter for its massively multiplayer online role-playing game (MMORPG) WoW franchise . While absolute figures look astounding (a loss of 600,000 subscribers), the fact remains that WoW still has 11.4 million subscribers paying monthly fees to play the game. But this got me thinking. Are MMORPGs viable analogies to social networking sites like Facebook and Linkedln?

On paper, the similarities between MMORPGs and social networking sites are limited to games. After all, the main purpose for individuals to join a MMORPG like World of Warcraft is --as the acronym suggests-- to play games against other human players. (I know from personal experience that playing against the computer is only fun when you're a newbie). Social networking sites, on the other hand, are predominantly for the purpose of facilitating communications between individuals. There are popular games on social networking sites, like Farmville on Facebook, but playing these games is often not a strong enough incentive to join. Another major difference is that MMORPGs charge a subscription price in one form or another: some like WoW charge fixed monthly fees, while others like Guild Wars only charges an initial purchase price.

Differences between the two aside, MMORPGs and social networking sites share a very significant element. Both are built on exponential growth models, meaning that their intrinsic value (to both the owners and the subscribers) is contingent on its popularity. The more subscribers use the social network, the more valuable it is -- and the same applies for MMORPGs. Either is useless/worthless when the population of users is minuscule. For this reason, at the onset there is an immediate need to popularize the platform and thus enlist as many users as possible. Facebook did this in the fall of 2006, when it became available to everyone with a valid email address. Activision Blizzard used the strong fan base for the Warcraft series to launch WoW, which fulfilled the dreams of many die-hard gamers by offering an immersive experience in the (fictionalized) Warcraft world.

But I am going to take the analogy one step further. Eventually, social networks and MMORPGs alike will reach a point of market saturation (where their growth in subscribers will stagnate as most of the target population has signed up). The only means of increasing the growth rate would be to innovate -- offering new products that expand on the target population's needs and desires. Again using Facebook as an example, Facebook introduced the controversial "newsfeed", "like" button, and third-party applications into its platform over the past 3 years. The counterpart for WoW has been expansion sets like the "Burning Crusade". These so-called innovations serve to maintain the subscribers' interest in the platform.

The Yahoo Games article pointed out that a likely reason for Blizzard's loss of subscribers is the slow rate of development for the WoW platform. Since its release in 2004, WoW only has three expansion thus far -- the last being "Cataclysm" in the winter of 2010. The point is that, as immersive and big as the game world is, experienced players will eventually become too familiar with it to the point of wanting to sample the competition. And boy is there competition in both platforms. For WoW, there are other MMORPGs being released or in development at the moment. We have seen examples like Star Wars Galaxies and the Lord of the Rings Online. For the social network giant Facebook, there is LinkedIn (as much as I don't like them) and rumored platforms in development by Google and Apple. As a general rule of thumb, companies (especially in the technology sector) need to constantly be innovating and releasing new products to sustain growth. Otherwise the relative ease of entry means popular platforms on day one will be forgotten within a year or two. Case in point: MySpace, Myst, and Halo (to a lesser extent).

From a valuation perspective, it would make some extent to use social network and MMORPG companies as proxies for one another. Their respective business models has notable differences --such as the subscriber fees-- but similarities are more pronounced. The problem is that there are not (yet!) single-standing MMORPG companies. As profitable as World of Warcraft is for Activision Blizzard, the company offers a variety of other game series such as Call of Duty and Guitar Hero. Conversely speaking, we may even extend the comparison to incorporate content-focused companies like Yahoo! and AOL. The latter's fortunes depend on internet traffic to their subsidiaries -- and therefore are inherently indicate a popularity-dependent business model such as social networks and MMORPGs.

LinkedIn's IPO (Update)

Having blogged about Linkedln's IPO yesterday and predicted it to be a future bust, you may think I want to put my foot where I mouth (or fingers, I guess?) with the stock's performance today. For those who do not know, the share price (NYSE: LNKD) more than doubled today to $94.25 per share at the time of this blogging. That is a staggering growth rate for any company. However, I still hold true to my predictions. Linkedln will fail in the long term --contrary to what this author from PC Magazine says (why is he writing about financial news anyway?).

To elaborate on the reasons given yesterday, the fundamental explanation is that the market does not know how to price the stock of social networking sites. There simply is no historical precedent from which to compare this to -- not even the dot-com bubble of the late 1990s. And without any way to gauge prices, investors go crazy in their optimism. I believe all social network sites to be fantastically valuated when their IPOs are inevitably announced; this includes Facebook and even Groupon. If anything, we can all learn from the fates of MySpace and (just came to mind) Bebo. Both companies are what we might call "epic fails".

MySpace was arguably the first of the social networking websites. Its network was not as strong as Facebook's, but it was unique when it first appeared -- and people flocked to it. I still remember when all my friends from high school had myspace accounts (I even secretly signed up for one...to stalk a girl I fancied back then). MySpace was launched in 2002 and then rapidly grew, expanded, all the way through past its acquisition by Rupert Murdoch's News Corp for $580 million in July 2005. At its height of popularity and usage, MySpace was valued at $12 billion in 2007. Today, News Corp is attempting to sell its 5-year old acquisition for reportedly $50 to $100 million. I can bet you that Murdoch wishes he had sold it back in 2007.

Similarly, Bebo was a social networking site created in 2005 as a rival to MySpace and Facebook. AOL purchased the company in 2008 for a staggering $850 million. But it would sell the company less than 2 years later for less than 2% of its cost, at $10 million. (If this is not epic fail, then I do not know what is.) Last year I interviewed with AOL for a position and vividly remember one interviewer shaking his head when I asked about the company's recent history. But judging by this Linkedln IPO, some lessons are not learned.

Look, Linkedln's future performance may prove me 100% wrong as it becomes a powerhouse of a social networking site. Its future value may justify its now insane $9 billion valuation. But these maybes are just what they are: maybes. Odds are more likely --especially upon reflecting on the failures of MySpace and Bebo-- that it will also fail. To me, the market has failed to valuate Linkedln properly and this will result in some very hurt shareholders in the future.

I will leave this post with a question and my own (biased) answer: what makes Linkedln so special to justify its $9 billion valuation? My answer is, it has pieces to justify a price tag but nowhere near $9 billion. Not even 1% of this current valuation. The first dose of reality is, when you compare Linkedln with Facebook*, you will find that Facebook is superior in every way and with the potential to steal Linkedln's market share. The second dose of reality is that Linkedln profiles are inherently not useful -- other than job seekers, there is no incentive for anyone to maintain a Linkedln profile. If you want to find out more about your new friend, Facebook provides much more useful (and more entertaining) information. All in all, the only way for Linkedln to be worth its valuation is that Facebook's future IPO is many times over its own. Not only is that scenario unlikely -- but also Linkedln better hope Zucks doesn't infringe on its territory.

*I like to compare Linkedln to Facebook in spite of being fully aware of their differences. After all, I have profiles in both sites. But I also see their inherent similarities, as is the case with every social networking website. Facebook and Linkedln depend on their ability to network one user to another -- only Linkedln has many less users than Facebook.

LinkedIn Failure Imminent

I heard rumors months ago that social network companies like Linkedln (and yes, Facebook too) were planning IPO (initial public offerings) to debut onto the stock market. When I heard the rumors, my first thought was that Facebook would be the first and my second thought was that I'd never buy their stock. Looks like my first thought was misplaced as...Linkedln seems to have beaten Facebook to the punch.

LinkedIn Rockets To $4 Billion Valuation, Who's Next? - NYTimes.com

Let's first review the reason for why companies want to conduct IPOs. IPOs, as its acronyms suggests, are a means to sell stock to public investors (e.g. investors on the open stock market). They are useful to companies because it helps tremendously to raise the capital needed for expansion, in addition to passing on the financial burden of failure onto investors. Another byproduct is that it makes the founders or major private shareholders extremely wealthy -- because their stake with a real-time value of 0 just exploded.

IPOs offer the advantages of allowing price fluctuations (mainly of going up) and of independence from a small number of investors. For publicly-owned companies, investor activism is generally much less likely than when shares are held by only a small number of investors. Investor activism still happens when you have pesky investors like Carl Icahn holding your stock; but these are "it is what it is" scenarios.

Back on the subject of Linkedln IPO. DealBook reports that the higher prices values the site at $4.3 billion -- a ridiculous sum of money for a business-minded social network with a much smaller user base than Facebook. I shudder to think what Facebook will be valued when it inevitably conducts its own IPO. All I can see is that it will be extremely overvalued.

Being a social network, Linkedln's current success in popularity is a mixed blessing. As soon as there comes along a superior alternative, it will quickly be displaced and its stock prices will free fall. And believe me, better alternatives will come along quickly. Nothing screams "compete against me" better than a massive valuation. But let's review some other reasons as to why Linkedln's failure is imminent (yay list of reasons!):

1. Tiny user base. "Tiny" is clearly an understatement here. The company boasts more than 100 million registered users, across more than 200 countries around the world. Clearly they have a strong foundation from which to build out. But expansion is limited due to the nature of the social network: it is business oriented. Furthermore, most businesses do not use Linkedln to advertise open positions because most businesses still operate with a dark-age mentality (internet as a last resort). One has a better chance of finding a job listing on Craigslist than on Linkedln. I do not see this changing much.

2. Competition. Facebook is clearly the elephant in the room here, and Zucks (Mark Zuckerberg) has shown his willingness to expand into other people's turfs (e.g. offering local deals to compete against Groupon). It only seems natural that Facebook would attempt to revise itself to target the business demographic. How so? I can easily seeing the company offering users the ability to establish a business profile independent of its social profile. When this happens, you can expect Linkedln's usage to half at least. Research studies have shown that people prefer the convenience of operating through one website, rather than two -- and Facebook already hosts a bunch of other services with theirs. Facebook > Linkedln. Everytime.

3. Lack of monetization opportunity. Whereas the beauty of Facebook (as described before) is that users voluntarily offer valuable information about individual preferences, the information posted by Linkedln users is not useful to marketers. Perhaps to job hunters/recruiters, but I cannot see Ford flocking to Linkedln for the opportunity to advertise its products through the site. This problem is compounded by Linkedln's small user base.

4. User interface stinks. I must admit that my negative opinion of Linkedln stems in part from my own experiences using it. From what I remember (this was over a year ago), a Linkedln profile offers no ability to customize and requires an enormous amount of user input before it becomes useful. Customization is very important to the long-term health of a social networking company -- MySpace offered too much, Facebook offers just the right amount. Even its touted ability to connect to other professionals (e.g. establish relationships) isn't very useful when the others professionals do not have a Linkedln profile. [And you better hope that recruiters from the desirable employers are savvy enough to check your Linkedln profile!] I just do not see revisions being made that could boost its user friendliness.

As with GM but with different reasons, I do not see myself ever owning Linkedln shares. Out of the proposed IPOs of social network sites, arguably Facebook is the only worthwhile company. Why not Groupon you ask? I may well be writing a post to discuss (or more likely...bash) soon but for now, I simply do not see Groupon as one with much growth potential. It's at its limit right now -- just like Linkedln.