Social networks may be the most valuable and durable types of businesses powered by “network effects,” the phenomenon of products or services becoming more powerful the more people use them.
The social-networking companies in our recently launched Network Effect Index — a group of current and formerly public consumer-Web companies valued at $1 billion or more — outperformed the S&P by over 170 percent in the last five years, the most of any business category in the index.
This is one reason the imminent IPO of social/mobile app Snap, which thrives on network effects, is being so closely watched. Another is that Snap — the parent of the ragingly popular Snapchat service, and a company expected to be valued at roughly $20 billion at its offering — represents the first credible threat to the Facebook social-networking colossus. Interestingly, Snap has grown by following a path very different than Facebook’s — so much so that we believe Snap ultimately could be valued less like a traditional social network and more like a hardware-software company, like Apple, or a media business, like Comcast.
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