There is a very good summary of the
basic laws governing social media over on Businessweek (seen on Techmeme). In discussing Twitter's future Ben Kunz writes:
Firstly, on Metcalfe's Law:
To understand the limits of Twitter's value, first look inside. Robert Metcalfe, co-inventor of the Ethernet, noticed that communication networks tend to increase exponentially with each single addition, a logic that today is called Metcalfe's Law. Think of a fax machine sitting alone and unplugged in your office; it has little value by itself. But plug it into a network of fax machines around the world, and suddenly that communications tool has huge potential.
Then on the Myth of Metcalfe's Law:
But Metcalfe's concept doesn't apply to Twitter [or any other social net]. The explanation why comes from two fellows named Zipf and Dunbar. Back in 1935, linguist George Zipf noticed that words in the English language are used in an interesting pattern. "The" is spoken most commonly, making up 7% of all utterances; "of" is the second-most common word, used exactly one-half as often as "the"…and the pattern continues with the 100th word in popularity being used only 1/100th as often. Zipf's Law suggests that each subsequent thing in any series (such as your Twitter contacts) has predictable diminishing value. Your spouse is more important than your best friend, who outranks your boss, colleague, and that guy you met on a plane from Chicago. Inside the 2.3 million-strong Twitter network, not all connections are equal, and some will never be used at all. You will probably never send tweets to ice skaters in Finland.
Further depressing Twitter's internal value is a concept from British anthropologist Robin Dunbar, who noted in 1992 that humans—like other primates—can handle only 150 relationships. If we try to add many more connections, our little brains get overloaded.
These are just theories, but they point out that Twitter is not a vast communications network of 2.3 million users squared. Rather, it consists of small pools of people with gaps and limits on how they interact. This is important to marketers and investors, because it puts big brakes on how internal communications could propagate inside any social media network.
Its very succinct, I wish I'd written such a good summary on this blog before (note to self - must do that Basic Laws of Social Net Economics booklet soon). To add some value and build on this though, the one key thing he left out is Coase's Law
about Transaction costs:
Coase noted...that there are a number of transaction costs to using the market; the cost of obtaining a good or service via the market is actually more than just the price of the good. Other costs, including search and information costs, bargaining costs, keeping trade secrets, and policing and enforcement costs, can all potentially add to the cost of procuring something with a firm.
Think of a Social Network as a "firm" in this regard and you find the same - whereas Metcalfe says the value of the network grows with each connection, Coase says the transaction costs grow with it, and as it grows they possibly grow faster (search, policing the spammers, winnowing the firehose) than the service value so at some point there is a crossover, the next new user adds less value than their cumulative transaction costs - and that is the boundary for each user's utility that design of social network.
It's Coase's Law that also breaks the argument of the
Long Tail as well - at some point while Zipf'ing down the tail, the transaction costs of finding that next (declining) piece of value is greater than the value you get from finding it. Yes, being digital and having search engines reduces costs, but there is still a growing cost as volumes increase.
This doesn't take away from the article's conclusions re Social Media's overall future as an Ad supported medium when it notes:
It seems social media users are too busy being social to pay much attention to ads. As marketers see poor results, they will move their ad budgets to other, more responsive ad media. The social media value bubble will be pricked by reality.
Funnily enough, I think Twitter has a bigger chance of making a go of ad-funding simply because it is lower friction than many other Social Nets. In a way, Twitter has also been lucky as it has escaped the overblown expectations of Facebook etc, but the article's view of the endgame seems on track too (I would quibble with their Ad value calculations but only insofar as they are optimistic for click throughs but neglect CPM opportunities) when Ben notes:
In the end, Twitter will most likely be sold and become a hood ornament to another service, like Gmail is to Google (GOOG) or Hotmail is to Microsoft (MSFT). The corporate buyer won't get much ad revenue, but it will pull millions of communicating consumers closer to its own business model.
There are Freemium and Sellling Virtual Goods models, but we suspect all large / generic Social Nets will move to some form of offset funding, as the real money is in the users, not the network itself.
