The Fragility of the Social Media Economy

Recently, Facebook changed it’s UI design. So did Twitter and FriendFeed. These are 3 of the top Social Media tools. All have developed an ecosystem around them, and none more so than Facebook. This shows a serious fragility in the Social Media Ecosystem – that one popular platform can have profound economic impact on the many businesses building off the primary in that ecosystem.

Just like auto makers that have begun to shut down and re-tool plants from trucks to smaller cars, there is a profound residual impact on suppliers to those big auto makers. A good article in All Facebook (an unofficial blog about all things Facebook) shows the surface of the impact of a UI design change in a popular Social Network. Apparently there are mixed reviews where some application developers and advertising engines have seen an increase in traffic/impressions while others have seen significant decreases.

Regardless of the nuances of the changes and traffic impacts, what is clear is that the Social Media economics remain fragile and reflective of any emergent industry. A similar set of occurences happened when Google first started changing its search algorithms and Page Rank rules.

While we have little doubt that Social Media and the Social Web will continue to see significant growth, a key challenge ahead will be how the economics will work. Just like the real-world, a major “manufacturer” can have a profound impact on the attendant companies building services and products off the back-end.

Unlike the real-world however, changes in Social Media services can be extensive and destroy business models overnight, while creating whole new ones. This creates some serious concerns over business model sustainability when it comes to adjunct services and products relying on a key player. The overall impact is still less than when an auto maker closes a factory putting thousands out of work, but there is still an economic impact.

Those providing consulting and advice on leveraging Social Media services will have a challenge to constantly understand and adapt to the quickly evolving economics of the Social Media ecosystem. Stability is unlikely to occur in the short term and we anticipate increased volatility as some services collapse in the coming months with monetization pressures. This issue also shows the power of a popular Web service. With Facebook making such arbitrary changes with little warning and forced compliance like Google, how these issues can be better managed will also be interesting. But that’s another blog entry.