Facebook and the Limits of the Network Effect

By the conventional understanding of the network effect, which states a service is as valuable as the number of people using it, Facebook can only benefit, right?

By the conventional understanding of the network effect, which states a service is as valuable as the number of people using it, Facebook can only benefit, right? The social network has 845 million users logging on to the site multiple times a day and only has plans to get bigger as it just went public this morning and needs to keep growing to prove its value. But, in Facebook's case, as the site grows and its network gets bigger, it will also get more annoying and less useful. Facebook's network effect isn't exponential, it's more of a curve, that will, at some point, start its downhill trajectory.

The essence of a social network is that it connects one person to another person. That's its value for regular people. And, Facebook's mission is to do just that, "the make the world more open and connected," as it describes in its S1 filing on that glowing web of connectivity over there. More connected means getting more people on the network. It also means getting them to share more things on the network. (Think: Open Graph.) For Facebook users, finding more and better ways to connect with friends or "friends" is the reason we use Facebook. That's the network effect in action. If none of our friends were on Facebook, for whom would we post those memes and vacations photos? We wouldn't. And the theory goes: the more people on there too share various things with, the more useful the product.

Facebook has succeeded at its mission. The site has millions of users and has shown steady growth since its inception. (See: Graphs below, from the S1.) And with its new Open Graph strategy, our sharing extends beyond photos and status updates to "verbs." So we are more connected in more ways with more people. But, that mission is flawed, if Facebook wants to provide a useful service. Making our worlds more connected only makes the service less useful. As it grows, Facebook connects us with people we don't want to be connected with all the time. Sometimes our friends turn into "friends" over time and we end up sharing things with this network that we don't really care about.One could limit their Facebook network to a select group of friends -- sans "friends" -- but at this point, not accepting a Facebook friendship is a social faux pas. Plus, whose mother hasn't guilted them into accepting a Facebook friendship? (This must be a trend if there was a Modern Family story line about it.)

And, as Facebook inspires more sharing of more things we do, we have even more opportunities to share things we don't want with certain groups of people. Sure, one can limit privacy controls. But, how much can we or do we want to micromanage our sharing? At some point it will feel easier to split our social lives on different networks with different friends. Instagram for that set; Path for that other one. And Facebook will have gotten so bloated we won't want to hang out there at all.

This migration might come naturally, but Facebook's business plans almost ensure the site will become an unpleasant Internet space. Facebook's business pitch relies on a growing audience. From the S1: "Reach. Facebook offers the ability to reach a vast consumer audience of over 800 million MAUs with a single advertising purchase." Facebook sells itself as the Super Bowl of Internet sites: All the eyes are here. The more eyes the better (for businesses) and, worse for users. So it must grow. But it also needs to get better at selling these eye-balls. Facebook earned an average of $1.21 per Facebooker each quarter, Google earned $7.14. To make more money off of each user -- and stop losing advertisers -- it needs a more convincing advertising model, which probably means a more annoying user experience. Because who likes anything ad related? (Not even Mark Zuckerberg!)