Second-Tier Social Networks Struggling

News is out today that social networking site hi5 is laying off a large number of its employees (TechCrunch speculates that it could be up to 50%). Word on the street has been that hi5 was in the middle of another round of financing, so these latest layoffs indicate that perhaps the expected funding won't be coming through.

While this is unfortunate for hi5 and its employees, it should not come as a surprise to anyone who has been paying attention to the social media space over the past year. On the professional side, LinkedIn has clearly established itself as the top player. Facebook has done the same on the "social" side (although plenty of people are now using Facebook as a career networking tool), with Twitter coming on strong as a potential challenger. MySpace, while still the second largest social network after Facebook, seems to be losing traction with growth practically flattened out. Here is a market share snapshot (sans Twitter) as of August 2008, image courtesy of TechCrunch.

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The disparity of users has become even larger over the ensuing six months, with Facebook and Twitter getting the overwhelming majority of the new audience as well as media attention.

Given that the "network effect" phenomenon is a critical driver in the success of social networks, what will happen to second tier networks such as hi5 and Friendster as this migration of users to the handful of "winners" continues? If these social networks continue down the path of trying to compete with the likes of Facebook, trying to define themselves as the leader in this country or that, they will find themselves out of business in short time. While I haven't come across any hard data, I'm hearing plenty of anectodal evidence that audiences across the globe are migrating over to Facebook in large numbers quickly. This will certainly doom second tier networks in the coming months.

The only viable choice these smaller, second-tier social networks have for survival is to find a place in the ecosystem around the "winner" networks, bringing their differentiating functionality to the users of Facebook, MySpace, LinkedIn, etc. hi5 seems to have recognized this recently (at least partially) and begun a shift to become a hub for casual online games. Alternately, the second-tier social networks could adopt a vertical strategy a la Ning and focus on specific categories with highly specialized functionality. However, this would imply a much smaller user base (although such users would likey be more engaged and loyal) and thus likely a smaller business opportunity. What will others such as Friendster and Beebo do? Stay tuned...

Update: VentureBeat is corroborating my hypothesis that an expected new round of financing at hi5 collapsed today.