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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:
(scroll past the image for more)
Now all of a sudden, Metcalfe’s Law works against you - for this, I will introduce the corollary, Eflactem’s Law.
Eflactem’s Law
Funny enough, everyone always talks about Metcalfe’s Law like it’s a good thing, and they say that because they assume that N is increasing! But let’s consider the opposite: If Metcalfe’s Law says that your network grows value competed by N^2, then Eflactem’s Law states the reverse. It says:
As you lose users, the value of your network is decreases exponentially (doh!)
That is:
- If you have 100 users, and then grow to 200 users, your "value" has increased from 10k to 40k.
- But if you START with 200 users, and end up with 100, then you are going from 40k in value to 10k in value.
And that sucks. Perhaps this should be called Murphy’s Law instead?
In fact, you see this happen all the time at dinner parties or events. Things are great until one or two people announce the intention to leave. If those folks are fun and entertaining, there’s an immediate realization that the quality of the experience is about to go down. And yet more people announce their intention to leave, and so on, until you are left with the party hosts and a big mess 
Advanced discussion: Social Network Death Spiral
Now let’s do a more advanced discussion using the concepts above - for some new readers, this discussion might completely be incoherent
Let’s consider a specific scenario where a social network could easily start to "Death Spiral" - here’s some set up on the scenario:
- You have a bunch of users, let’s call the total number N
- The total number of users in the ecosystem, called the carrying capacity, is variable C
- These users all individually require some utility value on a site, let’s call this V_required
- Then there’s a retention %, called R, which depends on two factors:
- If the utility value for users is satisfied, that is, V > V_required, then R close to 100%
- If the utility value drops under V_required, then R is crappy, closer to 0%
- And to borrow Metcalfe’s Law, the value of the network is calculated at V = N^2
So the scenario is that as the total users for the application reaches the carrying capacity, you basically hit a point of maximum saturation - this is defined by the ratio N/C. Sometimes this ratio can also be referred to as the "efficiency" of a user acquisition process, which relays how many people you actually acquire versus the universe of all users. (Obviously you want this to be as large as possible)
Once you hit the carrying capacity and acquire all possible users, N is at the highest point, and thus the network value is also at its highest point, V = N_max^2. Similarly, because the network value V is at its highest, the retention reaches its highest point as well.
The question in this scenario is, at any point during the growth of the network, does the network value V exceed the required value of the site, which we call V_required? Does the network break through the critical mass of value?
If so, retention should be great, as defined by the explanation above. In fact, maybe you reach V_required early on during the growth of the site, which makes the acquisition process much more efficient. Early on, maybe the userbase wasn’t sticking, but a critical mass threshold is met, and suddenly the entire userbase sticks, which creates a long-term creation of ad impressions and company value.
However, if you don’t reach the required value in the network, then you’re pretty much screwed. Then the retention sucks, since the users aren’t finding value, and some percentage of them will leave. This will then remove more value from the system, causing yet another round of users to leave. This continual loss of users is a death spiral that collapses your network in fine Eflactem’s Law style.
A very interesting variation of this is when you apply Metcalfe’s Law not to the entire network of users, but rather think of a social network as a loosely grouped set of connections. In that case, some local networks might have achieved critical mass, and if they are big enough, they will be retained. However, if the smaller networks around any given group start collapsing, then sometimes even the large networks will get pulled down with them.
Conclusion
To summarize this post:
- Gaining users is great, but preventing the loss of users is also very important
- Creating a sharkfin graph on your traffic means exponential descruction of value
- Critical mass plus network effects implies that complete collapse of networks is possible too
As always, comments and questions are welcome.
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To take your party analogy, the two people are important but that is because the average quality of the audience (or relevance to me) is the most important.
As n gets larger it gets more inevitable that quality will approach the overall population average (that is, unacceptable to me).
And then the spiral starts as people's level of quality acceptance gets hit as the people leave.
So Facebook did well by creating a finite space that doesn't let just anyone participate in your neck of the woods.
The best essay I read about the destruction of communities as they get too big was by Clay Shirky: http://shirky.com/writings/community_scale.html
So basically, I don't think the relationship plays out here as there is a tragedy of the commons in any community.
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Great post!
I always liken web startups to a leaky bucket with a hose pouring water into it.
You can focus on increasing the flow (making the "hose" work better) or you can focus on plugging the holes.
Increasing the flow (with new opportunities in viral marketing and old standbys like SEO) is comparatively easy and feels really good.
Plugging holes is hard and only incrementally rewarding.
If you look at great businesses that you envy, I think you'll find most of them focus more on plugging holes... Adding value for users (first and foremost), providing outstanding support, and optimizing the sales funnel.
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Naturally, you don't want to see users leaving your site but the question remains -- what do they leave behind (and for how long)? Everyone could ditch their Facebook accounts today but the data Facebook possesses still has value.
As the previous poster Niki noted, the "relevance" of the information is a huge factor in determining the value of data since some sites have more active and engaged users than others...
Good article.
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@Work Post: I'm not so sure the data Facebook possesses has meaningful value if it stops flowing in. Perhaps for a little while but it will decay rapidly.
I think there are great examples of authoritative sites where if people come, contribute and leave then they have still created value during their stay that lives on after they depart. Think wikipedia.
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Andrew,
Good post. I addressed this topic on a post I wrote for Centernetworks.com about a Twitter monetization plan.
In short, I pointed out, as you do, user retention is critical. Once people start leaving, the service (Twitter, FB, MySpace, etc.) becomes less useful; this makes even more users leave.
I like your party analogy, once the cool people leave, everyone knows it's almost over!
Greg
beYOU.tv
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It's interesting that in the early days in the life of social network there seems to be a huge land grab. Many rely on flashy graphics and a couple of A-List blogger mentions and any guys with an social application can see short term success.
However, as with any product you got to provide value for them to stay. This basic concept seems to be missed by so many new social networks.
I suspect for the social networking start-up the key is to gain users while Metcalf's driving the bus and close the funding before Eflactem drives it over the cliff.
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I agree to a point. The point where I start to balk is the implication that once people start leaving there's nothing the 'hosts' of the party can do to turn things around again. This isn't necessarily true. Break out the top-shelf booze, as it were. Step up your game, do something drastic. Going back to the web reality of this conversation, obviously you add V, if you can think of a way to do so. I think facebook is hoping that they can leverage their developer network to increase V and that the introduction of efforts to monetize won't reduce V so drastically that 'death spiral' occurs.
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Important topic, good points.
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Jakob Nielsen said exactly the same thing nine years ago, in an article called "Metcalfe's Law in Reverse".
http://www.useit.com/alertbox/990725.html
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Welcome to the challenge of starting a band in a garage. It's called 'butts in seats'.
Business isn't that hard. Marketing is.
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In fact, either retention-based or acquisition-based strategies can work well for long-term business survival. Churches have concentrated on retention, universities on acquisition. Indeed, universities are actively hostile to retention -- they actively get rid of 99.9% of their customers after just a few years! (Though they do take steps to get them back again later when they hopefully have more money.)
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Andrew - How do you think Ning's "double viral loop" ("every network creator is a user and any user can become a network creator" - Fast Company) impacts Metcalfe's law?
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Niche social networks are the future. BUT they have to offer more than the one trick pony giants out there. Revenue: Advertising and Value: offer more than just connecting with people. Most niche social networks are missing the point too, advertising and keeping you connected is so web 2.0. /yawn
I have cracked the code. Hope to see you at TC50.
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Sounds like people are talking about the end of Facebook without coming out and saying it. Is a tipping point near?
For me it came when I realized that Twitter is just much more fun than Facebook. We all have a compulsion to check email, but Twitter is much more addictive because each day might bring that special Tweet that changes your life.
Facebook doesn't have that. Facebook is boring like a corporate Outlook inbox, except instead of HR memos I have to read about what high school friend I haven't seen in years is now friends with another high school friend I didn't even like in the first place.
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Cute graph but a work of fiction.
Social networks fracture when they reach a certain size unless you build in schism points - a way to swarm down into smaller groups. This is a well known phenomenon and has a variety of names: in the opensource community it is called "forking" - creating additional prongs as competitor communities.
Secondly there is an implication that the larger SNs will always win out over smaller SNs. Not true. Hitwise shows that the top 40 sites for stickability (not volume/broadcast, but niche/addictive) are not well known - Facebook is 40th and I only knew 2 others in the top 40 (Habbo Australia and Gaydar). (I've been a community strategist for around 20 years so I should know the others). It is a mistake to think that the SNs we all talk about (MySpace, Twitter, Facebook) are the SNs where we live/are loyal. Thinking broadcast will kill off many a community app or even a community. Start to think targeted and engaged - we stay loyal to smaller niche communities, and tend to find the larger ones non-nutritious.
Incidentally, advertising has been shown time and again as the LEAST ROI on community investment...
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Good golly heck, we echo your thoughts entirely, Andrew.
As more and more niche social networks hop on the proverbial band wagon, they'll each have the same challenges of making their sites 'sticky'and continuing to offer huge, tangible value to their ever-fickle members.
On that note, we've been talking with Chris Brogan about having a "Niche Social Networks Summit" at his Podcamp 3 event in Boston this July. Maverick community leaders should attend and can get on the list by emailing me at
Richard@BlackWidowNetwork.com
Let's try and stay ahead of the curve....
Richard Dale-Mesaros :)
Chief Deal Weaver
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SilkCharm, you make a good point.
I can't remember exactly from, but I recall reading about a community (something like the Amish) will split into two communities once they reach a certain mass because the human mind is unable to form more than around that number of relationships.
So there will be a limit to the size of a useful social network.
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Interesting. The talk about forking, about Ning, and about the Amish (!) are all related to Reed's Law, don't you think? The value of the network doesn't just rely on the number of nodes - it relies on the fact that in networks GROUPS CAN FORM. So there's a lot more time on your horizontal axis than most people thing. Doesn't guarantee that Facebook (as one example) will crash and burn, but it suggests it may take longer than we all thought. At some point, you have to account for functionality too. For example, yes - Facebook allows you to form groups. But the effectiveness of those groups at DOING SOMETHING is almost non-existent. This, to me, is the harbinger of doom for Facebook...
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