Network Effects and the Decline of Facebook

Let me start with a story. You have a friend, let's call him Paul, who used to work for a big shot consultancy. A few years ago, the consultancy was undergoing a periodic cost-cutting exercise; Paul happened to be on the bench and was let go. He didn't immediately find another full-time job, but he found a series of short-term contracts to pay the bills until something else turned up. And of course he changed his profile on Linked-In.

Three years later, he's still in the same position. You receive a notification from Linked-In, asking if you would like to congratulate Paul on the anniversary of his losing his job. Doesn't really seem appropriate, does it?

One of the problems of social networks is maintaining a reasonably signal-to-noise ratio. When most of the notifications on Linked-In are to tell you that someone you barely remember is attending some random event, it's tempting to switch off notifications altogether.

And Facebook notifications can be even more annoying. Many years ago, Bill Gates quit Facebook because of the volume of friend requests he was receiving. Taylor Buley cites this as an illustration of Beckstrom's Law. 

The best-known model of network effects is Metcalfe's Law, which states that the value of a network is proportional to the square of the number of users. Beckstrom's Law is a more advanced model, and includes the net value of the transactions on the network. Thus subtracting the aggregated costs of belonging to the network, including all those bothersome requests and notifications.

This week, the Facebook shareprice crashed. In his analysis of this event, John Naughton suggests that the value of Facebook depends not on the absolute number of users, but in the rate of change, and this is what explains Mark Zuckerberg's obsession with growth (as shown in Ben Grosser's montage "Order of Magnitude"). If user numbers start to decline, then the virtuous circle suddenly turns vicious, leading to a downward spiral.

What is also clear from this event is the extent to which Facebook's commercial success is dependent on other players in the ecosystem. Access to Facebook services is almost entirely channelled through devices running software from three other tech giants - Apple, Google and Microsoft.

And with Microsoft's recent acquisition of Activision Blizzard, we may expect more shifts in the balance of power between them. According to Microsoft's announcement (18 January 2022)

This acquisition will accelerate the growth in Microsoft’s gaming business across mobile, PC, console and cloud and will provide building blocks for the metaverse.

 

Your move I think, Zuck.

 

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Dina Bass, Five Reasons Microsoft Is Making Activision Blizzard Its Biggest Deal Ever (Bloomberg,18 January 2022)

Taylor Buley, How To Value Your Networks (Forbes, 31 July 2009) 

Michael Hiltzik, Is this the beginning of Facebook’s downfall? (LA Times, 4 February 2022)

Natasha Lomas (@riptari), On Meta’s regulatory headwinds and adtech’s privacy reckoning (TechCrunch, 4 February 2022)

John Naughton, For the first time in its history, Facebook is in decline. Has the tech giant begun to crumble? (The Guardian, 6 February 2022)

Wikipedia: Beckstrom's Law, Metcalfe's Law

Related posts: What makes a platform open or closed? (May 2012), Making the World more Open and Connected (March 2018), Metrication and Demetrication (August 2021)