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Real human social networks (as opposed to the tools that facilitate online communication
between people in a social network) have an obvious reverse network effect. If I have too many
people in my social network, I cannot pay enough attention to each of them, and without
attention, relationships fade.

Back in September 2007, we looked at social motivation in the real world, specifically the two
distinct types of motivation. One is, "I want to communicate better with the people I already
know and trust". The other is, "I want to increase my visibility so that I can connect with more
people."

Both have clear limits. The number of people I can really ÷
 and  is limited, because
knowing and trusting take time and attention. Increasing visibility, whether by blogging or
tweeting or advertising or PR, is less limited. But when visibility goes beyond a certain number
of people, it becomes no more social than broadcast media or spamming. The personal touch is
gone. The real community spirit is gone.

As Groucho Marx remarked, "I refuse to join any club that would have me as a member." If it is
an exclusive club, the membership has to be limited. If it is not exclusive, is it really "social"?

eBay is the classic example of a network that lost its community spirit after reaching a certain
scale, as the comments on this post vehemently demonstrate. This loss opened the market for
eBay alternatives, such as Bonanzle. It is unclear whether these alternatives will face the same
issues when they get to scale.

Etsy will be an interesting case study. It looks like it may avoid the reverse network effect by
being focused entirely on handmade goods. That focus may limit its eventual scale, as not
everybody wants to make or buy handmade goods, but it will still be able to build a business
more than big enough to satisfy even the most demanding dreams of avarice. That focus on
handmade goods will act as its social glue. It will grow as eBay would have had it decided to
remain focused on the global garage sale, not getting lured into selling mass consumer goods. I
suspect if eBay had done that, its core business today would be smaller but ultimately more
profitable and sustainable.
 
 
 

eBay the corporation owns two businesses that have almost perfect network effects and do not
suffer from any reverse network effects: PayPal and Skype.

PayPal works for consumers because merchants use it, and merchants like it because consumers
like it. The fact that everybody likes it won't make me like it any less.

Skype gets more useful with each new user, and each new user promotes Skype, consciously or
unconsciously, for his or her own reasons. Even better, the cost of providing the service goes
down with each new user, and that is really unusual (a function of Skype's P2P architecture).
Google and PayPal also benefit from each new user, but they still have to service that user, and
that costs money. In the case of a video service such as YouTube, the servicing cost is
significant. So Skype really is in a league of its own when it comes to network effects, and that is
why it may become the world's largest telephone company and the biggest economic success
story of the Web 2.0 era. (Google Voice, having just thrown its hat in the ring to battle Skype,
will be interesting to watch. My bet is on Skype.)

The difference, though, is that we do not look at these services as communities. They are simply
enablers of commodity transactions: payments and phone calls.

u  


Does Facebook still feel special now that it has 175 million users and is growing at a rate of
600,000 per day? That is a sincere question for Facebook users. I am one of the few people who
do  use Facebook. For whatever reason, I never got into the habit. And I have no compelling
reason to start now. This has made me a bear on Facebook for a long time. As a non-user, I miss
what makes Facebook special and why it grows so fast.

The network that I use is LinkedIn. I use it to connect to people who my contacts know. As far as
I am concerned, it is a utility in the same way that the phone or my email/CRM system is a
utility. Do I care that LinkedIn has 7.7 million users now? Does that make it more valuable to
me? No. Is Facebook 22 times more valuable „
 than LinkedIn because it has 22 times more
users? No.

Here is the theory:

In a social network, the value for existing users of a new user joining the network plateaus once
users have most of their own contacts in that network.

Of course, the social network grows in value pp

 as more users come into it because
the network then has more eyeballs to sell to advertisers. But that is different from network
effects. As a LinkedIn user, I do not benefit when more strangers join. I already have about 90%
of my contacts in there, and the remaining 10% may remain hold-outs; and I don't really care
anyway, because I can always reach them outside of LinkedIn. When I meet somebody in
business, I look them up on LinkedIn and connect if they are on it (I cannot recall anybody
recently who was not on it). I do that to keep my Rolodex updated, which is a very valuable
utility for me. But my actions are not growing the network. If I joined a new network, I would
spam all my contacts asking them to join, but I have zero motivation to do that.

As a long-time Facebook user, do you care when more strangers join? Does it make any
difference to the value you get from Facebook?

So, it is possible that the network effect has a natural plateau.

 !u"#  

$u"
Whether that plateau turns into a downward slope depends on the monetization strategy adopted
by the "owners" of the social network. And in the social networking business, a downward slope
can very quickly become a steep slope or even a cliff. Trust tends to be binary; viral can work
both ways; and switching costs are minimal. That is why I put "owners" in quotation marks. You
can never really own a social network or community. You can provide services and extract rent
for only as long as the community wants those services and is willing to pay the rent.

This is where the incredibly high valuations of businesses such as Facebook and LinkedIn may
become problematic. If these businesses get too eager to monetize to justify those valuations,
they may create the reverse network effect.

There are only two ways to monetize: ask for revenue from users who regard the service as a
utility (like paying for the phone company), or ask for revenue from vendors that want to sell
something to the people using the service. Thus far, all the major social networks have taken the
latter fork in the road. They don't want to become utilities because that wouldn't justify their lofty
valuations. So they have to sell more to those who use the service. At that point, the reverse
network effects may kick in.

%

 
Craigslist chose a different path by not taking on external investors. It has no valuation to justify.
It can leave masses of money on the table without any worries. So Craigslist won't suffer the
reverse network effects that come from over-eager monetization. Its model of allowing lots of
free listings will sustain high growth and is clearly impacting eBay's business.

& 

 
%u$
Once again, Twitter is the interesting one to watch. The ease with which one can add and delete
who one follows makes its size self-regulating. As a real-time search tool, its value goes up with
each new user. As a communication tool, it goes up as new people join who might be interesting
to follow. Its openness may prevent the reverse network effect.
The other reason Twitter is an interesting case study is that it has not yet disclosed its revenue
model. If the revenue model it does adopt involves selling to its users, the reverse network effect
may kick in. Twitter would become classic MBA case study material, a fact of which
management must be well aware!