The Faceoff between the Interest Graph and the Social Graph
In February of 2009 I mentioned to Fred Wilson (www.avc.com) that I wished it were possible to arbitrage the stock of private companies, specifically Twitter and Facebook. At the time Twitter was valued at $250 million and Facebook at $10 billion. The trade would have been; long 40 units of Twitter and short 1 unit of Facebook (40/1) to make it $10 billion against $10 billion (or fractions thereof). The most current valuations are $80 Billion for Facebook and $10 Billion for Twitter, or 8/1. So far the hypothetical trade has been hugely profitable. But the trade isn't completely played out yet, not by a long shot. Here's why:
IMO Twitter will eventually eclipse Facebook in terms of market capitalization. It's not a matter of if, but when - and the reasons are pretty straightforward. The Social Graph is far less monetizable than the Interest Graph, and symmetrical relationships don't represent the complexity or richness of real life like asymmetrical relationships do. This isn't good news for Facebook, because Facebook = Social / Symmetrical, and Twitter = Interest / Asymmetrical.
Don't get me wrong; I think Facebook will continue to be a very large and important player. But its revenue generating potential will ultimately be constrained by the nature of the relationships it was built to facilitate. As Judy Shapiro wrote in December of 2010;
"Commerce happens in communities of interest - not social networks." Because of this and other factors, I fully expect that Facebook's "One Identity", increasingly AOL circa 1998 platform will eventually cede its leadership position to Twitter, both in users and revenues.
Update December 13th 2012: Facebook has a current market cap of ~ $68 billion, Twitter $12 billion. Expect the valuations to continue to converge in earnest throughh 2013.
Update November 4th 2013: Twitter is about to go pubic on November 7 and its valuation is expected to be in the $15 - $20 billion range while Facebook's current valuation is approximately $118 billion. That means the ratio between the two has narrowed only marginally in 2+ years, which I attribute to the fact that Twitter is still struggling to create more utility for its users, especially new users. Onboarding for new users is still a complete mess and deep media integration created to increase advertising revenue will take the platform only so far. Twitter still has a chance to become the most used and most valuable social network ever created, but unless and until they start concentrating on becoming a true information utility (rather than a media/advertising company) they will drastically limit their potential and unnecessarily leave themselves open to competitors and disruption.
