Technology is our friend: Non-linear value creation - and non-linear value demolition
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March 24, 2011

Non-linear value creation - and non-linear value demolition

Since Facebook is conquering the world, other social networks have to suffer. On a global scale, we can see this with my_________ (space), locally in Germany we can observe StudiVZ losing users at a dramatic speed. According to these ComScore figures, myspace has lost 43.3% of unique visitors from February 2010 to 2011 - and this development is not losing, but gaining momentum: From January 2011 to February 2011 alone, there is a decline of 14.4% in unique visitors (from 73 to 63 million). In Germany, according to IVW, the "VZ Netzwerke" had 437 million visits in June 2010, 334 million visits in January 2011 and in the following month, February, they reached 274 million visits. Again, the speed is accelerating.

Some people are in shock and awe about the speed of this development and how the loss of traffic actually keeps accelerating when you think they might have hit rock bottom. Personally I think that is simply the logic of the business they are in. In most cases, it is not even bad management or wrong strategy: it is the so-called "network effect" that made them benefit at the very beginning - and now leads to impending doom.

Social networks create most of their value from the amount of users that on the one hand create, on the other hand consume content. That is their network effect. The more users you have, the more attractive your platform becomes for other users - and the more value is created. That is why StudiVZ, myspace and many others had staggering growth rates once they reached a critical mass of members - even if they weren't the best products around.
Just like a credit card company that needs points of acceptance to become a real choice for customers, but needs customers to gain points of acceptance, a social network needs users to create value so other users can join - who will form a certain value themselves. Just like an auction platform that is attractive to sellers of products only through its mass of potential buyers, but gets attractive to potential buyers only through a mass of products on sale, a social network needs creators of content and recipients - simply a mass of active consumers creating value through participation. Once a critical level of value is reached, the "network effect" generates such power that you not only see non-linear but in many cases even exponential growth. One of the best explanations of this network effect dates back to 2009 (and was late even then) - very interesting to see Sean Parker's explanations about myspace and StudiVZ. I embedded it on this blog before, but it doesn't hurt at all to watch this presentation from time to time.

Being the positive-minded guys that they are, the Silicon valley guys often focus on the bright side of life. Of course, this is only half the truth. The network effect goes both ways. What happens when users start to leave a social network is not only that there is less advertising revenue: It means the deconstruction of value for those left behind.
The product itself loses value, regardless of the quality of applications or tools offered. 
Once some realize that they get less out of their visits to the network, they leave, too, destroying even more of the value and so on. So what we are witnessing with myspace and StudiVZ is simply a negative network effect. Just like their growth, their downfall is non-linear and at some point even exponential. Nothing to be suprised about, but yet another proof of how powerful the fact that we are all well connected can be. These "amazing" numbers of decline in "pre-Facebook" social networks are not really amazing or surprising but simply inherent to the logic of the business that they are in.