So two months on after first exploring the fauxionary economics of Metcalfe’s law can we definitely say the web 2.0 myth of “the bigger the network the more valuable the network” is busted?
As we have seen before the results are somewhat mixed but a trend does appear to have emerged that social networks trend towards lower ARPU’s after they have achieved ignition (or should that be self awareness?).
Away from the analysis and the crunching of the ARPUs of the various networks my general impression is simply this. It is self-evident that if we assume the opportunity for infinite growth in the network there comes a point in the growth curve where adding extra nodes must inevitably prove to be the tipping point that sends the network heading towards chaos and once that point is reached the value of the network must decrease with each additional node that is added.
Having said that it would appear to be very difficult to pin point where that tipping point may be. Is it 150 nodes, is it 150 Million nodes, is it 150 Billion nodes or is it more?
What we do know is the realised value of these social networks only ever appears to be a mere fraction of the potential value. This in turn suggests that the Web 3.0 economy will be all about developing new and more effective methods of extracting value from these global networks.
We also need to recognise that not all the nodes and the connections scattered across the network are created equal and that the first 15 years of the web has proven time and again that some “nodes are more equal than others” and the real winners are in the business of targeting and harvesting the high value nodes that are scattered across the network.
The economic reality of the web 2.0 network business model is something of a hybrid model (as illustrated below) of Metcalfe or Reeds Law (you choose your preferred network growth model) meets Chris Anderson’s Long Tail theory in which only a fraction of the potential economic value of the network is ever realised.
Of course none of this is new. The questions surrounding the application of Metcalfe’s Law to the economics of the social network have been a topic of discussion since the birth of web 2.0 (e.g. See Bob Metcalfe’s guest post on VCMike, Benjamin Ellis’s Metcalfe’s Law really useful not, Broadstuff’s A short discussion of Metcalfe’s Law for social networks and Noah Brier’s Metcalfe’s Plateau (2008)). What is surprising is that after 15 years of collecting user data so little progress has been made in developing a new economic model that describes the economic reality of the online social network economies.
Postscript:
If I was to put a “magic” number on the potential economic value of the social network based on all the ad-hoc analysis that has been conducted over the past 18 months it would be 0.5%. Most of the engagement statistics we have encountered so far across a broad range of activities and networks (be it Meetups, Facebook fan page engagement , Zynga’s Game Addicts or Twitter advertising CTR’s ) have fallen within the range of 1 to 0.1%.
It should also be noted that Chris Anderson’s original premise for Free(mium) was a 1% conversion rate and that estimated has been mirrored in the experience of Freemium startups like Dropbox and Pandora.
What is interesting of course is if we mash together this freemium conversion rate with Jeremy Liew’s $2.8 web media modelling estimate and a $1.00 per month subscription fee we soon discover that the freemium start up would have to have twice the monthly traffic of the leading tech blog (i.e. TechCrunch @ 12 Million uniques) just to break even.
Further reading:
- Yet another look at the problem of calculating the value of a social network
- In search of a Social Media valuation beyond the fauxionary economics of Metcalfe’s Law
- How do you monetize a social network?
Posted on July 20, 2011
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