The Rise and Fall of Networks

The following has long struck me as obvious, but it occurred to me yesterday that it might not be. So I share it herein.

We are aware of the phenomenon called “Metcalfe’s Law.” Roughly that the value of a network is proportional to the square of the number of users connected to the system. This “network effect” is perhaps the most important value driver in the world today. Because the value of the network increases with the number of people on the network, there is a self fulfilling prophecy. Past a critical point the biggest network is more attractive than any other competing network. Which means that it gets more users. Which means that it gets more valuable. Which means that it is more attractive.

It can be a pretty quick ride to monopolistic vastness. Just ask Facebook, YouTube and Twitter.

OK. Lets call this feedback loop the “network attractor.” Once you have achieved some critical point, your platform is like a black hole that sucks in everything and makes escape increasingly impossible.

Now I would like to introduce a new concept. Perhaps even a new law.

“Any for-profit entity that is founded on the value of network effects must maximally extract that value to the limit of the network attractor. This produces an ‘extractive repulsor’ force. As the limit is approached, the network becomes poised at fragility.

Note that the extraction of value does not necessarily come in the form of “optimizing for profit.” To be sure, much of it does — things like increasing the number and intrusiveness of ads often shows up — but a lot of the ‘extraction’ comes in other forms. Things like reduced customer service. Or increasing use of the platform to accomplish goals that are anti-valued by the users. Of particular note is the increasing intrusiveness of the platform itself — sucking value out of the whole of the user’s life and into the platform.

The specific form of the extraction is up to the specific platform. But the rule is general: the camel will be loaded with straw until the last.

And then we have the final piece of this new law: Metcalfe’s law cuts both ways. If the value of a network increases exponentially as you add new users to the system, it also *decreases* exponentially as users leave the system.

But on this side of the ride the network has a problem: it is now burdened with the ‘extractive repulsor.’ So unless the folks in charge of the platform can figure out a way to reduce the extraction at an exponential rate, even a small number of people leaving the network will quickly lead to a torrent.

Through the relentless carelessness of value extraction, the system has become “hollowed out.” All surface area, no volume.

As quickly as systems built by Metcalfe’s law can grow, by Halls’ law, they can even more quickly collapse.