The Law
In economics, a network effect is a positive benefit created by a new user buying a product or joining a service. In the context of computer networks, these benefits are commonly believed to scale quickly with the number of users.
In technology circles, perhaps the best known instantiation of network effects is Metcalfe’s Law, named for Ethernet co-inventor Bob Metcalfe, who was likely inspired by similar theories developed at Bell Telephone in the early 20th century.
This law concerned the value of the Ethernet network cards sold by Metcalfe’s company 3Com. It states that given a network with N users, buying one additional Ethernet card provides you with N new possible network connections (e.g., from the new card to each of the N existing users).
It then follows, roughly speaking, that the value of N network cards grows as N^2 instead of N. Once a network achieves a certain critical size, therefore, the value it returns will quickly begin to far exceed the cost of joining it, creating a powerful positive feedback loop.
Metcalfe’s Law is incredibly influential in Silicon Valley, where it’s often applied to justify the monopoly status of the social media conglomerates. If a network like Facebook has over a 1,000,000,000 users, the law tells us, then its value to users grows as (1,000,000,000)^2 — a quantity so vast that any attempt to compete with this giant must be futile.
It’s widely believed among many Silicon Valley types that this calculus helps explains the lack of venture capital investment in new social media start-ups in recent years. The power of network effects in this sector is unimpeachable.
But should they be?
AOL Redux
I’ve long harbored suspicions about how network effects are referenced to justify massive social media conglomerates.
If you examine the canonical examples of these effects, such as 3Com’s Ethernet cards or Bell’s telephones, you’ll notice that joining the network in question is the only way to connect to other people in that general manner.
In 1908, if you didn’t own a Bell telephone, you couldn’t talk in real time to people over distance. In 1988, if your computer didn’t have an Ethernet card, it couldn’t connect to other devices in your office. In these scenarios, buying the relevant product shifted you from completely disconnected to massively connected.
Social media, however, is different.
In 2018, joining a network like Facebook enables you to connect with or monitor the status of people you know using digital networks. Unlike telephones or Ethernet cards, however, you don’t need a private network like Facebook for these benefits. Both the Internet and SMS, among other technologies, already provide many different tools, protocols, and services for connecting and disseminating information digitally.
Case in point: I’ve never had a social media account, and yet I constantly enjoy connecting to people, and posting and monitoring information using digital networks.
So what then exactly do massive social media platforms like Facebook provide? A more honest answer is that they offer a more convenient experience than the wilder, less centralized social internet, but not something fundamentally unique.
There’s value in convenience, but not Metcalfe’s Law level, dominating value. In some sense, Facebook is to the social internet today what AOL was to the world wide web in the 1990s — a walled garden that provides a gentle on-ramp to the capabilities of a more exuberant decentralized network roiling beyond its boundaries.
These are thoughts I’m in the early stages of developing, so I’m interested in any pointers you can share about people smarter than me exploring similar ideas. But it increasingly seems to me that social media giants like Facebook offer at best network enhancements to its users, not the mythical network effects that helped make the monopolies of past eras so inescapable.
Seems to me that the assumption about the power of these networks assumes that all connections are the same. In fact, that’s obviously not true, and the value of connections will be different for different people in different context. I think it’s this dynamic quality of a connection coupled with the number of connections that reflects the value you’d have by joining a network.
What about WhatsApp (which is owned by Facebook)? In some countries, like Spain, it’s virtually impossible to keep in touch with people if you opt out of it, since 90% of smartphone owners there have it installed and use it as their main, even only, digital communication platform. Heck, it wouldn’t be a stretch to say they communicate far more frequently by means of WhatsApp than by talking face to face.
Wouldn’t that constitute a network effect rather than an “enhancement”?
I agree. WhatsApp, in some countries, actually does induce strong network effects, which is part of the reason why Facebook paid so much to acquire it.
Facebook the company is smart to devisify its portfolio. Look how netflix changed over the years to stay on top of buisness.
Such is the case here in Brazil. Whenever two people want to keep in touch somehow, the question is never “Are you on WhatsApp?” It’s: “What’s your WhatsApp number?” (it’s basically inconceivable not to be there)
I’m curious how you “post and monitor information using digital networks” without relying on social media networks. I understand direct communications such as email, but how are you able to monitor a network without being part of the network? How are you able to discover or meet new people/resources without some type of network?
Over the last 2 years I’ve deleted my social media accounts, but lately I’ve become increasingly frustrated as some businesses and social groups in the US have decided to rely entirely on Facebook for information sharing. Since I’m not a part of the network I’m outside the walled garden. This has left me completely out of the loop even though I’m willing to connect directly (a business that only responds to FB messages instead of email).
For example, I use a blog and an academic web site. I know a lot of people who were around pre-social media who use an email list to keep friends up to date on their status and share interesting ideas/links. A lot of people also share photos with family and friends with tools like iCloud, instead of Instagram, etc.
It’s also true that lots of groups and organizations use tools like FB groups to organize events. But there are other options if they didn’t want to.
An anecdote in support of your point: My wife is a heavy Facebook user, for fun and for her sales business. I keep trying to tell her that FB is holding the cards, and while it makes many things easier for her (“convenience”), it ties her hands in a lot of ways, primarily around reach (you have to pay if you want all your followers to see your message) and scheduling (followers received your posts 0-36 hrs after you post them, if at all). She recently used a text message broadcast platform and got much better results, and nearly instantly.
Yes, many experts in digital marketing discourage people from what they call “digital sharecropping,” which is another way of saying what you said to your wife about Facebook holding all the cards. Best of luck to her in her business!
One thing that social media like Facebook seem to be optimized for is organizing events and making invitations to lots of people all at once. This too relies heavily on the network effect.
This makes sense, given that Facebook was started as a way to connect college students to allow them to schedule parties. The modern use is more an example of scope creep than anything else.
Here, too, there are other options for scheduling and recording attendance of group events, from a simple list or email group, through a shared calendar, all the way to sites like eventbrite.com.
Think about what Google is doing with Apple-Safari (paying around 3 billions per year to be the default search engine). What it takes to FB to do the same? (e.g. Paying big companies to restrict the customers service only through FB)
I agree. It’s an interesting thought process. Any kind of social media, specifically Facebook, is not central to the experience of the network. Like you rightly said, it does provide a better experience…
At the most, social media is one of the ways of being in the network and utilising it.
> These are thoughts I’m in the early stages of developing, so I’m interested in any pointers you can share about people smarter than me exploring similar ideas.
I think Ben Thompson of [Stratechery](https://stratechery.com/) is relevant. (Don’t know if he’s smarter than you :p)
> These are thoughts I’m in the early stages of developing, so I’m interested in any pointers you can share about people smarter than me exploring similar ideas.
I think [Stratechery by Ben Thompson](https://stratechery.com/) could be of interest. (Don’t know whether he’s smarter than you, though.)
Nowadays Facebook is mostly used to connect with like-minded people (Facebook groups). For example, I participate in a zero waste group and a local food sharing group. It is much easier to create such a group on Facebook as most people are already there.
Oder upside of Facebook is serendipity: you are more likely to learn some new ideas through those groups and your connections.
But of course it all depends on how you use it.
Agree. I found myself wasting time on FB, and being triggered to post responses to political posts, and wanted a better way. But I didn’t want out of FB entirely because I enjoy the writing group and local fitness group that I’m a part of. So I unfollowed everybody else. I mean every single person. I didn’t unfriend anyone, so I can still occasionally look them up and see what they’re up to. But I’m in control of it. It works for me. I did something similar fir twitter: I unfollowed everyone except creative people/writers, libraries, book sites, etc. And I deleted the apps from my phone. Now my social media time is not just s default.
Facebook and other social media create illusion of connection, same illusion of knowledge is provided by google. Facebook provides easy way to know what the person is doing, and give simple feedback in form of ‘likes’ and comments and this is what makes illusion so powerful and that what gave Facebook edge over AOL or ICQ. From my experience I can tell that if I didn’t connect to person in real life, I would eventually lose virtual connection. Eventually I deleted all my social accounts and left all all forums. Real connections and knowledge gained in deep conversations and work and take time to build.
Cal – if you haven’t already I think that you should read “The square and the tower : networks and power, from the Freemasons to Facebook” by the renowned historian Niall Ferguson (currently at . The historical perspective might be of incredible use for your research.
I think that your comparison between Facebook and Bell/Ethernet is missing a very important link about the convenience – and lack of innovation – of social media: the good ‘ol BBS’s, popular in the late ’80’s and early 90’s. No one ever talks about them as the actual turning point in our networking system.
Cal, if you haven’t read it, you might be interested in Information Rules: A Strategic Guide to the Network Economy by Carl Shapiro & Hal Varian. It was published in the late ’90s, but I think a lot of its points are still relevant today. I was actually assigned to read it for a class I took as an undergraduate about the economics of technological change, and I really enjoyed it.
– At some point I heard that Zuckerberg doesn’t mess around with the Innovator’s Dilemma, so he knows that FB can end up like AOL in the future. Hence, purchased Instagram, Whatsapp, etc,… buying potential threads and new social verticals (Oculus).
– Communication is the main value offered from network effects and now is a commodity. Furthermore, in order to survive, they need to get your attention at all cost because ad conversions depend on it. The info published is no longer Precise nor Relevant and decreases the value perceived by users, this is the start of the end.
– A good example of social verticals working is WeChat in china, which seems to have a huge advantage, offering real value to users and getting some margin on their services. i.e: payments. The interests are aligned with the users. (Keep posting and writing good stuff Cal, love it)
Two thoughts:
Facebook spread virally. Just like other pandemic viruses people are slowly becoming inoculated to it.
Facebook and other social media companies also have characteristics of a generational fad. Just like music artists come and go for new generations, it is possible that we will see successive waves of social networks, instead of one network for all time.
Facebook and twitter are on top for now, but that is no guarantee they will last forever. A couple serious mistakes can send them spiraling downhill where people quit virally just like they joined – just like myspace, or disco, or sending telegraphs – or ethernet cards in an increasingly wireless era.
Sorry, not info about other smarter people working on, but a different variable: the need to adjust the formula for the negatives due to size.
This is just anecdotal, but Facebook has gotten less and less valuable to me personally as its growth has led to the ever-greater inclusion of material I don’t want to have to sift through …
Stumbled upon an interesting concept that could be the least bad scenario : IndieWeb.org
The content that you post is yours, as it’s posted first on *your* website, but also take leverage of social silos (Facebook, Twitter, …) to spread the word.
The main problem I found is that it is note very easy to implement fully, and I consider myself reasonably tech-savvy.
What’s your thoughts about it?
I think the real value of Facebook at this point would be the “gentle onramp” for people who otherwise would never browse the web. Consider the typical adoption profiles: techies, pragmatists, conservatives, and laggards. The conservatives and laggards are typically frightened by new technology; they need something to be easy and definitively mainstream before they adopt it. Facebook’s walled garden is just that. So businesses who want to get in touch with these otherwise-untapped markets (that amount for 40-50% of the market) are getting massive benefits from Facebook’s success in connecting with these groups.
great article.
only those old enough to even know 3com, will appreciate.
F the rest of the young-ins.
I agree with Yngve that Ben Thompson of Stratechery might be the most insightful commentary I’ve read on the importance of Facebook and what he calls “the aggregators.”
This link on aggregation theory would be a good place to start. It’s a pay site, but worth the $.
https://stratechery.com/aggregation-theory/
Have you heard about the Data Transfer Project (https://datatransferproject.dev/)? It is an “open-source, service-to-service data portability platform so that all individuals across the web could easily move their data between online service providers whenever they want.”
If it succeeds, it will completely eliminate any kind of network effect of social media, regardless of whether or not we’re talking about “enhancements” or traditional “effects.”
The interesting piece is that the Data Transfer Project has buy-in (i.e. is organized by) Facebook, Google, Twitter, and Microsoft. The exact companies that would have the most to lose.
Any ideas what could be motivating them to even consider this?
Awesome article!! I agree.
You missed a key difference. Facebook is free to the users while AOL is not.