How long will “social networks” be around, and how long is the tail?

by carterfsmith on 03/27/2008

A recent article in my not-so-favorite form of media, the NYT – addressed: Why Old Technologies Are Still Kicking. The article identified the common traits of survivor technologies as 1) some enduring advantage in the old technology that is not entirely supplanted by the new, and 2) business decisions that invest in retooling the traditional technology, adopting a new business model and nurturing a support network of loyal customers, industry partners and skilled workers.


Is that what’s happening with social networking?

In The Roaring 2000s, Harry S. Dent made some interesting observations and predictions. He missed the boat on a couple of them (like the Dow reaching at least 21,500 by the year 2008 — it barely passed 14,000 in October 2007 and hasn’t been the same since). In all fairness, there have been some significant unpredictable events, but take a look at what Dent was seeing here. Dent found recently that it was typical to have a major crash and shake-out as new technologies approached 50% penetration on the S-Curve, and in 2006, he forcasted that most stocks will soar to unprecedented highs—most likely to around 20,000 on the Dow by 2009.

Dent saw and examined the impact of new technologies on the S-Curve, and I think that’s critical as we examine the longevity and enduring advantage of technology like social network or networking sites (not to be confused with the activity of social networking, which doesn’t need a specific site). Boyd and Ellison (2007) define social network sites (as distinguished from social networking sites) as web-based services that allow individuals to (1) construct a public or semi-public profile within a bounded system, (2) articulate a list of other users with whom they share a connection, and (3) view and traverse their list of connections and those made by others within the system.

Dent explains the growth catalysts of the S-Curve like this:

The first comes as many early stage market entrants go under as the product first moves mainstream around 10% market penetration and the field of mainstream potential options narrow down. Then there is a second and most violent shake-out as the product moves towards 50% penetration and growing competitors over-expand. That shake-out shifts market share further to the strongest leaders who bring costs down further through larger economies of scale. Once the industry matures between 90% and 99.9%, foreign or new competition often sets in and even dominant leaders have to fight to maintain market share in an era of declining growth and margins.

So where are we with social networks?

I think it depends on how you are looking at these sites. Social networking sites as they are used now ultimately serve to identify the changes in our approaches to socializing, especially dependent on the stage of life we are in. Take a look at three of these sites (my reasons for being on each of them were covered previously). We’ve got the mall (of MySpace), the Coffee Shop (of FaceBook), and the Chamber of Commerce function (of LinkedIn).

There is a likelihood of traditional social use — both with MySpace and the mall.

Youth (and some adults) enjoy the time spent in “hanging out” at the mall. That’s where groups of friends go to the mall to show off recent acquisitions (clothes, mobile phones, etc), to hang out with friends, and to hang out with friends of friends you can’t connect with in your neighborhood.

Adults are more likely to meet in Facebook or at a coffee shop.

The local coffee shop is a place way from home, perhaps an office-like environnment that can be used as a place to work or a place to relax. It’s a short term stop between other personal and professional errands. It’s a neutral, friendly place for informal conversation for business or pleasure. And most of them are more than a coffee shop.

People with business on their mind are more likely to go to LinkedIn or a Chamber of Commerce function.

LinkedIn has mall-like qualities, as does a Chamber of Commerce mixer. People often gather (group) together to chat, plan, or introduce others, and it’s pretty clear why they are there (it’s likely there’s a clue on their nametag or profile). LinkedIn allows us to share details about each other and our professional interests, and provides a useful venue for introducing others.

LinkedIn also has coffee shop qualities, as it provides a place where business isn’t the only thing that needs to be discussed. That’s especially helpful in Chamber of Commerce mixers in some of the Southern U.S. locations, where it’s taboo to conduct business before spending a minimum of 15 minutes about the weather, politics, and your choice of either the SEC or NASCAR.

Their use often differs by demographic, and their specific use and potential are different.

So where will social networking sites be in 5, 10, or 15 years?

In Metcalfe’s Law is Wrong, Briscoe, Odlyzko, and Tilly say that Metcalfe’s Law, which says that the value of a communications network is proportional to the square of the number of its users, is wrong. Of relevance for this topic is their observation that:

The fundamental flaw underlying both Metcalfe’s and Reed’s laws is in the assignment of equal value to all connections or all groups. The underlying problem with this assumption was pointed out by Thoreau in relation to the very first large telecommunications network, then being built in the United States. Thoreau wrote: “We are in great haste to construct a magnetic telegraph from Maine to Texas; but Maine and Texas, it may be, have nothing important to communicate.”

The authors noted that if Metcalfe’s Law were true, it would create overwhelming incentives for all networks relying on the same technology to merge, or at least to interconnect. These incentives would make isolated networks hard to explain. They introduce Zipf’s Law, which says that if we order some large collection by size or popularity, the second element in the collection will be about half the measure of the first one, the third one will be about one-third the measure of the first one, and so on. In other words, the kth-ranked item will measure about 1/k of the first one. They also propose their own calculations, which states that the value of a network of size n grows in proportion to n log(n). They note that this cannot predict the value of a network from its size alone, but if we already know its valuation at one particular size, we can estimate its value at any future size, all other factors being equal.

Here’s the n log(n) law in application:

Imagine a network of 100 000 members that we know brings in $1 million. We have to know this starting point in advance—none of the laws can help here, as they tell us only about growth. So if the network doubles its membership to 200 000, Metcalfe’s Law says its value grows by (200 0002/100 0002) times, quadrupling to $4 million, whereas the n log(n) law says its value grows by 200 000 log(200 000)/100 000 log(100 000) times to only $2.1 million. In both cases, the network’s growth in value more than doubles, still outpacing the growth in members, but the one is a much more modest growth than the other. In our view, much of the difference between the artificial values of the dot-com era and the genuine value created by the Internet can be explained by the difference between the Metcalfe-fueled optimism of n 2 and the more sober reality of n log(n).

There’s a lot more to their argument, but I think the key is that as the shakeout in social network sites continues (are you listening AOL, Google, and Microsoft?), the real valuation can be estimated, but only based on a previous real valuation. If we look at the anticipated growth with the expected mergers and acquisitions, it’s possible we may avoid the kind of pain we saw with the bubble bursting in the late 1990s.

And so, Metcalfe’s law is trumped by Zipf’s Law and the law of n log(n) — leading us to The Long Tail of social network sites for which we still don’t have an assigned value.

So how does this fit with our look at social networking sites?

If an enduring advantage and a retooling mindset are the keys to success, then social networks should be around for a while. These sites didn’t invent the social part, nor did they invent the networking part, so the enduring advantage is there. They facilitate acquaintence and reacquaintence, and are run (at least initially) by technology entrepreneurs — with a retooling mindset built in. I think the question is not whether they will last, but in what form they will emerge, and how many mergers will we see before the shakeout is over.

As note in a previous post, I see a tendency toward focusing on specific social networking sites, but in the future I think many of us will simply be using what was “learned” in these sites to just be more social — out in the open, on an Internet without walls. The people we relate to, the relationships we have with them, and the use of available communication tools are the keys to success in this space, not “the site.”

What do you think?

References:

Boyd, D. M., & Ellison, N. B. (2007). Social network sites: Definition, history, and scholarship. Journal of Computer-Mediated Communication, 13(1), article 11. Available at http://jcmc.indiana.edu/vol13/issue1/boyd.ellison.html

{ 4 comments }

Michael Pokocky March 28, 2008 at 8:38 pm

bonus+ I am also a writer that can’t spell too but heard Hemingway couldn’t as well.

Michael Pokocky March 28, 2008 at 8:37 pm

@ Carter. It’s not about value. It’s about waste. Surely the discussion on this blog and the resulting book of which you are author opens up the conversation for the future in the present about sites and funding them and revenue models that will support “this transparency” as “free” seems to be where and what the user demands.

Had the information on this site along with the information I researched to build my own social networking site with a “cause” only to take it down after 1/2MM$ had been burned through because I knew not what I was doing. How’s that for transparency. But what I gleamed through experience and participation in this blog and your book through the “cartoons” I graciously donated and never asked for anything — ask Margaret or Jay — is proof enough for me that this “conversation” is the one I’d be watching if I was a potential investor now or in the future. Of course if I invested now I’d be in for the still to rise share value of sites and then I’d ride it on the way down on the short sale. There is news today of a $100MM investment in such a site by an Asian tycoon. Why? For the money of course.

Keep up the good work Carter and remember there is a heck of a lot more in this mind of mind than I have shown. I try to be transparent and respect my own moral value of never doing harm where good work is being done. However as people who know me they have seen how “crazy” I can become in my contextual arguments when I am backed into a corner or pushed around to much. I am a sensitive soul. Hell I write poetry. However I am a man of an elite investment background that I walked away from because of its inherent intransparancy if there is such a word, and if not I just invented it.

I am also a writer with 11 unpublished books under my belt, and this comment gave rise to a book I should write about the “real” investment world. That would be a bestseller. Think Wall Street with a Hannibal Lectar twist. I am a fiction writer of course…hahaha

Take care carter and the gang,

kindest,
/michael

Carter F Smith March 28, 2008 at 3:25 pm

So are you suggesting there would be more value in hitting the walled-gardens with Roundup and opening the gates on the gated communities?

Have we reached the point where AOL 2.0 isn’t as comfortable as we need it? I suspect there are still a very few who want to converse in the open on the Internet — that would require way more transparency than many are used to . . . even if they are sipping the Kool-Aid.

Michael Pokocky March 27, 2008 at 9:23 pm

The first site I joined was Linkedin.com about five years ago.

My theory then and it still holds is this:

Consider this matrix model,

1. good decision = good result
2. good decision = bad result
3. bad decision = good result
4. bad decision = bad result

Knowing that Linkedin.com had no historiccal data from which to make a decision they just put together whatever they thought would be the “Attraction Factor.”

The company grew over the years by leaps and bounds and then the “hard question” had to be answered, “How do we make money as we burn through VC money at an alarming rate?”

That question has still not been answered internally and yet the site continues to grow.

It is clear from the matrix model that # 3 was there “mantra” and this can easily be translated into, “Its a company that buys into its own bullshit.”

I call this “Grim Reapers Law,” whereby, assuming there are no governing laws that can explain the “phenomena” of their success, the only conclusion to be drawn from their success is based on one thing only: The idea that it is better to not know what you are doing so that the “illusion” of success can be perpetuated until it reaches an undetermined finite point where site will simply cease to exist.

Extrapolating this law throughout the whole social network and social networking sites we can draw the “reasonable conclusion” that the future of these sites is directly dependent on the amount of VC money that is thrown at these site. When these sites begin to show no revenue models to justify their market capitalization the VC money will dry up and their will be an implosion of all of these site. To put it more directly they will “crash” and the Grim Reaper Law will prevail.

Thanks to sites like this that explore this topography drawn from data collected along the way there will be a new emergence of sites in the future that will be based on # 1 above.

Then and only then will the ideas presented herein on this blog become the “go to” source for “knowledge” and “ideas” that can be fine tuned to the concentric sites I predict will be born as a result.

/michael

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