Social Network Death Spiral: How Metcalfe's Law Can Work Against You
Metcalfe's Law
Does everyone remember Metcalfe's Law? It was formulated by Bob Metcalfe, the inventor of Ethernet and co-founder of 3Com, who stated:
The value of a network is proportional to the square of the number of users of the system (n²).
For those that are interested in the math behind it, basically the idea is that if every new node in the network connects with every pre-existing node, then as you gain nodes, you non-linearly increase the number of connections that everyone has with everyone else.
That's pretty neat, and for the social networking folks who are aggregating large audiences and treating their businesses like communication utilities, it's both logical and helpful to think that these social communities abide by network effects like Metcalfe's Law. In fact, it's a DIRECT reason why these networks want to get as big as possible, and have a social graph that's as comprehensive as possible, and why they should ultimately be opposed to Data Portability. And I think we'll see these players' strategies ultimately reflect these strategies.
But Metcalfe's Law can also affect social app creators. Let's discuss how this might play out for folks who are building apps on social platforms, rather than operating the social platforms themselves:
"Jumping the shark" and Metcalfe's Law
In a previous post, I wrote a bunch about how dangerous (and easy) it is to jump the shark in an enclosed space like the Facebook Platform.
Here's the good scenario:
Let's say that you retain users
well, and you don't get a sharkfin graph on your traffic. In that case,
if you combine the two ideas - Metcalfe's Law and with the viral loops
on the social platforms - you can imagine that in the success case, you
are creating N^2 value with very large N.
For folks building application on Facebook, Opensocial, etc., it's nice to think that your new app is gaining value much faster than if you built your own destination site. This allows you to get the N^2 benefits of Metcalfe's Law without incurring significant costs of acquisition as you scale N up to a large number. This the best of both worlds.
Here's the bad scenario:
Let's consider the other case,
where your app's retention sucks, and you are going through the
sharkfin graph of rapidly acquiring users, hitting a peak, and then
falling down:
Now all of a sudden, Metcalfe's Law works against you - for this, I will introduce the corollary, Eflactem's Law.
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