Viral Loop Interview Part II: Why Facebook Beat MySpace

In Part Two of my interview with Adam Penenberg, the author of the new book on viral marketing called Viral Loop, he revealed how to find out your dollar-value on Facebook; how a game called Zynga makes a fortune off of "virtual goods"; and how the banner ad is killing online journalism. (Part One of my interview is here.)

Your book suggests that friend networks are only going to grow in value, as companies rely on their customers to spread their products. Might this cause a backlash?

Viral marketing is not new. In David Liss' latest novel, The Devil's Company, he paints a delicious scene that involves an early 18th Century representative of the Dutch East India Company offering free clothes to noblemen who were popular in their social strata. Within days there's a run on this particular fabric, as it becomes the must-have garment for the elite. Already our relationships have been turned into informal marketing arrangements. That's because you trust your friends. If your buddy likes Saucony shoes and tells you about their merits then you are much more likely to buy them than if you saw an ad online or in a magazine. You trust your friend because you don't think he has been bought out by the company selling those shoes.

The important thing to remember is you can't fool people and expect your product to go viral. Users have to like it so much they are willing--even enthusiastic--about spreading the product to their social networks. It's part of collective curation, when the audience decides what's good. If you are heavy handed and don't offer the user value they are not going to cooperate. In fact, they are going to rebel. When they do you're in trouble. Because if you push revenue schemes too hard people will migrate elsewhere. This is what happened to many of the early app makes on Facebook. They installed too powerful viral hooks, commandeering users' address books without permission. But their growth was not sustainable. Because nothing that is bad can go viral. You need people's cooperation.

I wonder if viral loop companies aren't particularly risky long term investments. When barriers to entry in your niche are so low that you can grow into a multi-million dollar company without even advertising, don't the same conditions that enabled your success apply to your future rivals? I'm thinking of Friendster, MySpace and Facebook. I know a lot of people who cycled through all three - and it seems likely that something else is going to be next. Are viral loop companies particularly prone to boom and bust?

For all the talk about Facebook's growth rate declining, it gained 50 million users over the span of 60 days last summer. Twitter is also growing at a fantastic rate. Both have very loyal users who spend an enviable amount of time using them. In the world there are more than 100 social networks and growing, and probably 1 billion people on them. The number of people getting on the Internet is also growing fast. I don't see either one hitting ultimate saturation. Of course, that will happen one day. It happened to eBay, which has a market cap of about $30 billion. Is it growing like it once did? No. But I'd rather have eBay's problems today than, say, Friendster's, which took off quickly but sabotaged its own success. It simply couldn't keep up with demand; it had terrible problems scaling, which I go into in the book. In the end its users migrated to other networks like MySpace and Facebook. MySpace's problems have a lot to do with social and economic class. Facebook became the network of college students, then college-educated people. MySpace became "ghettoized"; profile pages can remind you of flashy rims on souped-up cars. Then News Corp layered in advertising in a quest to make money. It has backfired. Facebook, on the other hand, has had missteps but has managed to hold on to its audience.

If you attract a large enough loyal base of users and meet their needs, people are not likely to leave. Look at Google. Web searchers are only a click away from any number of other search engines yet Google keeps increasing its market share. Why is that? Because the perception is it's simply better. More likely though, Google became an ingrained habit--a verb. Once people commit to a product they become loyal and are not likely to leave unless something clearly better comes along. It's a major reason why marketing skews to younger people. It's not like 18-24 year olds have a lot of money. It's that if you get them young enough--sell them a Toyota or Saab, they are likely to stick with that brand through life.

Authors often lament that editing down a manuscript is a torturous process of "killing off your darlings." Are there any anecdotes or other interesting information that you particularly liked, but that didn't make it into the book?

I wouldn't say I felt tortured but certain things I liked I simply couldn't work into the book. One area I would have loved to explore was virtual goods, especially through the experiences of game app maker Zynga, which created Mafia Wars and Farmville, which between them have more than 80 million users. Zynga is also making money, and loads of it. Half of its revenue, I understand, comes from advertising, the other half from selling virtual guns. Want to buy an assault weapon to better your chances in Mafia War, it will cost you real greenbacks.

These apps are viral and stacked atop viral networks like Facebook, MySpace, Tagged, etc. Because Zynga creates multiple apps that run over multiple social networks, it's conceivable Zynga could amass more users than Facebook. Think about that. A business sprouts on top of a viral network only to become bigger than the network that spawned it. This happened with YouTube, which overtook MySpace (YouTube took off on MySpace and nothing MySpace tried to stamp it out worked.) PayPal was stacked atop eBay, which tried to choke it off but failed. So eBay bought PayPal and now within a few years it's likely that PayPal's revenues will surpass those of the mothership.

That's the power of the viral loop. Never before in history has it been possible to create this much wealth so quickly and starting so little.

Anything I didn't ask about that you'd like to add? Also, where can we buy the book?

There's so much more to talk about. That studies show that we as humans have a biological need to social network, or that our digital representations of ourselves are more real to more people than our actual physical selves. There are viral coefficients that you shoot for to make something go viral and the impact that digitization and collective curation are having on Hollywood's entrenched power structure. There are the fascinating stories of entrepreneurs who started with simply a great idea and built digital empires, and a plea to kill off the clickable ad banner, which has been destroying the media business. Think about it: Newspapers, magazines, and online news sites have predicated an entire industry online on something nobody does: Click on ads. (Do you or anyone you know do this?) So there's an intense battle to figure out the next ad unit, and, if successful, it has the potential to save newspapers. Sounds impossible? It's not. Conventional wisdom used to claim that there was no money in search either--until Google came along and urned it into a multibillion-dollar industry. We may be close to the same thing occurring in online media.

It's all covered in Viral Loop, which you can pick up at any major bookstore or through Amazon. And to learn more there is, of course, a website: viralloop.com.