David Cohen, of TechStars (www.techstars.org) a huge supporter of entrepreneurship in Colorado (www.coloradostartups.com) , and Angel investor, has a series he and Brad Feld do called Big or Bullshit. He just wrote one on Vertical Social Networks.
His question is: Will they ever be big enough to be worthy investments? His second question is: Doesn't the aggregation of these networks contain more value?
On the first one, I say: big, not bullshit. Why? Community. We're communal animals and community has been part of how humans operate from the beginning. We're clever beasts though and we use our tools to improve community. I won't go through a history of it here, but I'll start with computers. In the early 80's, modems became available to the average person. What's one of the first things we did? We wrote BBS's(Bulletin Board Systems). Each tended toward specific communities. The whole social networking phenom of today isn't new, it's just more common to have the tools in your day to day life. In 1982, few people had personal computers. Today, the majority of US households do. Put a cell phone in the mix (which is becoming the PC of choice for the rest of the world), and you have the tools you need to participate. Social Networking is just better interface, easier to use and more realtime communications and richer media. MySpace is just one big BBS system with more advanced user tools.
Can verticals be valuable enough to be worth investing in? Again: yes. It all depends on the drivers. Here's an excerpt from an article from CNN's Business 2.0 magazine on one set of verticals (note that the title is a bit sensationalized, this is, after all, CNN territory):
The accidental 'friend' finder
(Business 2.0 Magazine) -- You know how you'll be trying to do work, and the Internet will inexorably drag you into porn? That's exactly what happened to Andrew Conru's career.
A mechanical engineering doctoral student at Stanford who grew up with churchgoing Lutheran parents in northern Indiana--the kind of guy who holds the door for everyone until he gets stuck there so long that someone has to make a joke so he can let go--Conru started the first online dating site, WebPersonals, in the early '90s. He sold it in 1995, pocketed a minor windfall, and started all over again.
Now he owns 27 sites under an umbrella company called Various, controlling twice as much online dating traffic as better-known rivals Match.com and Yahoo (Charts) Personals. But his clients tend to be much more fun. That's because most of them post pictures in which they're having sex. When you've already seen your date naked, it's a lot easier to focus on what she's saying.
Of all the dating sites Conru has launched--ones for Latinos, seniors, Asians, Jews, churchgoers--the biggest by far is AdultFriendFinder, which accounts for more than 60 percent of Various's revenue. Conru says his privately held, 450-person company brings in well over $200 million in annual revenue, averaging 40 percent growth for the past nine years. With more than 35 million visitors in 2006 and 75,000 new users registering each day, AFF ranks among the 100 most popular sites in the United States.
OK, I'll grant you, this is effectively adult content and we all know how popular that is. But this (if you take recent numbers on the porn industry in the US into account) is around 8-10% of the entire adult business take in the US (about $2.4B in 2006). And non of it is professionally produced. It's all user generated social networking DNA at work.
People are passionate about sex (doh!) but what about their dogs? Music? Religion? Politics? It's all based on the driver and if that driver is something emotionally important to that community, that's powerful stuff. Will Dogster get to $200 Million a year in revenue? I doubt it, but $20 million? Yea, that I can see happening. And that's a marketcap in the $150-200M range. Not a bad investment if you ask me.
The packaging of these (and using the same infrastructure, development and some content) is where you can get to FriendFinder levels of revenue and profit. How about Petster Inc. doing a Dogster, Catster, Snakester, Birdster, Fishster, etc.? Go down the long tail and add it all up. Dogs and Cats-the most popular pets (the head): Say, $30 million (60%). All the rest (the long tail), say $20 million (40%). That's up to a $500M marketcap potential there if you play it right.
Second are his observations on aggregators. He says, take the idea of OpenID and expand it into your 'full profile'. These will take off as well, but for different reasons centered mostly around convenience for the user and the perceived, by the user, value of that information. As we become more sophisticated about the value of our own personal information habits online (your Clickstream) we'll want to control that and gain some financial advantages for our attention (discounts, coupons, better targeting of the ads we know we have to see anyway, etc). That's not community though. There's nothing social about it (if anything I'd say it's more selfish than social). Is it a business? Absolutely. A big one? Most likely yes, but it'll take average people becoming aware of the value of their attention first. That's going to take time.
In the meantime, everyone loves their dog.
If I was thinking 'next 3-5 years' and had to pick vertical social networks or social network aggregators, I'd put my money on the vertical social networks.