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Riding the social networks wave

This wave hasn't crested - it really is the next big thing - but who knows where it will all lead? Can Microsoft and Yahoo jump in? Fortune's David Kirkpatrick explores the next phases.

By David Kirkpatrick, Fortune senior editor

NEW YORK (Fortune) -- As MySpace hooks up with MTV (whose parent Viacom once tried to buy it) and Facebook makes the cover of Newsweek, it's clear that social networking is only getting hotter. (But couldn't Newsweek find Mark Zuckerberg anecdotes that hadn't already appeared in Fortune?)

The reason social networking matters is simple: people do things together, and this new software promises us the means to engage the social aspect of our lives in everything we do online. Among other things, shopping, consuming media, researching, planning our time, and of course communicating can all be done more efficiently if we have manageable information about what our friends are doing. It goes way beyond high school and college kids sharing photos and exchanging gossip.

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Since Facebook's epochal May announcement that it was opening itself up and hosting applications created by all comers, the Palo Alto-based service has kept Silicon Valley mesmerized. Here's how much: This week I breakfasted with eggheady serial enterpreneur Scott Rafer, who sold his latest company MyBlogLog to Yahoo. Rafer's new project, still hush-hush, is a Facebook application. But his faith in the earthshakingness of Facebook apps is such that he actually said to me: "Now Google might as well not get into the apps business, and finally something will take a bit out of [Microsoft] Office."

For all his apparent hyperbole, Rafer has a good track record of being right - and early - about what's happening on the Net. Here's something else important: nyone who writes an application for a social network will never be in doubt about who its customers are. That is a breakthrough for the software and media industries, which typically have only the foggiest understanding of who is really using their products. Companies thus have a newfound ability to upsell, renew, fine-tune, and improve applications and content for the exact people who are using them.

When I asked Rafer what he thought was a good application on Facebook, he replied, as I had expected he would, "There aren't any." For all the buzz and millions of sign-ups, it is striking how few applications there really do anything people seem much to need. And while Facebook has clearly stolen the short-term thunder from MySpace, at least from the tech industry's perspective, the MTV deal is one indicator of many that the social networking leader is not down for the count. Among other things, it is aggressively expanding internationally.

So do these two players have the industry locked up? Hardly. While Facebook's applications give it tremendous potency and MySpace still clearly dominates in scale, other services like Bebo, LinkedIn, Piczo and Tagged continue to grow quickly.

And as some of us learned at Fortune's recent iMeme conference in San Francisco, Yahoo (Charts, Fortune 500) and Microsoft (Charts, Fortune 500) cannot be ignored. Yahoo executives there were saying that Yahoo Mail and Hotmail both have the rudiments of a profound social network. Each has hundreds of millions of members, and each company has access to information that could be used to construct the kindof "social graph" of friend relationships which is at the heart of MySpace or Facebook. That key data is in each e-mail user's sent mail records. The people you send e-mail to are pretty much the people you know. That's one reason why both MySpace and Facebook allow you to mine your e-mail contact lists to create additional friends in their services. But the sent mail information is even richer with friendship insight than any contact list.

The question is whether Microsoft or Yahoo can move quickly enough to take advantage of this gold mine. Yahoo execs say they are actively working on it, though most of us aren't very confident of Yahoo's ability to shake the earth these days. Rafer notes that some in the Internet industry are starting to talk about services that mimic Facebook's architecture, enabling any application developed for it to also tap into the social graph of other networks.

That would not be so bad for Facebook, because it would further validate that service as a standards-setter for this growing industry. Before it would play along with a game like that, though, I'd suspect Microsoft, for its part, would probably want to buy Facebook. It will have trouble tolerating someone else's platform getting that much traction. But it could certainly come up with the $10 billion (minimum) that would probably now be necessary for such a deal.

The social networking industry is going to get a lot more interesting in the next year or so.  Top of page