The Law of Diminishing Returns of Network Effects

As a16z’s Anu Hariharan summarizes in her All About Network Effects deck, a “network effect occurs when a product or a service becomes more valuable to its users as more people use it.” The deck goes on, in brilliant fashion, to show us how the economics of network effects play out in social networks and two-sided marketplaces from Facebook to Airbnb.

I think in 2017, were witnessing two phenomenon with respect to network effects: 1) platforms are subject to a law of diminishing returns, 2) this has lead to noise. The result of these two phenomenon is obvious: 3) people want to retreat to smaller communities over time and 4) its harder to find new signals, aka its harder to become famous.

Diminishing Returns for Users

On Investopedia, the law of diminishing returns states that “an increasing number of new employees causes the marginal product of another employee to be smaller than the marginal product of the previous employee at some point.” With more employees, the output of the group becomes less per employee. Let’s extrapolate this to the a16z thesis and user platforms.

With network effects, the platform becomes more valuable (to users) as more users come to the platform. But with diminishing returns the output becomes less when the platform cannot appropriately utilize the producers (or employees). This is interesting when you consider that in social networks like Facebook, all of the users are also producers of content. Therefore, the user who benefits from network effects is also subject to the law of diminishing returns. In sum, Facebook users will all eventually hit a saturation point in their usage where the amount of friends (and updates) they get experience diminishing returns for them.

I can personally feel this in my usage of social media. As I added more people to my friend circle and followed more people in the timeline, the usefulness of Facebook diminished. As more people came onto my timeline, even though Facebook was algorithmically surfacing the appropriate people to me, it still felt noisy. What am I getting from my friends? Their updates and pictures all blur together into a collage of memories and thoughts that my two hundred thousand year old brain infrastructure can barely keep up with. It’s no wonder that young adults using social media are more likely to experience depression.

Users have too many friends and they get less out of Facebook than they give to it. Their experience results in a net negative experience.

Signal, Noise, Fame, Chatter

With more crowds, and more noise, we now have an environment where it’s harder than ever to get a coherent message across or even to just be famous. Its an odd paradox. Weve reached a saturation point for noise, where now if you want to be famous you have to have a brand or brand association as a jumping off point. With too much noise, people now want curation and expertise. Gone is that brief era where people could pierce through the chatter. And even if you have, the chatter will instantaneously augment it to its own emergent ends. It is so noisy that its hard to even hear signals, let alone ones own signal.

(Dis)Connecting on Social Media

The above is interesting when you think about the unprecedented amount of connection that we experience today via social media and the internet. We are more aware of each other than ever before. We can react at fiber-optic speeds to events happening across the world. Yet we, via the plethora of potential cognitive biases from our post-primate brain, are more than ever beholden to our own ideas and prejudices. In the late 90s and early 2000s, it would have been difficult to predict that humans would enter a new polarized era in the late 2010s. With the biggest connections weve ever had, were also more disconnected than ever in other ways.

This calls into question what do we mean by a platform that becomes more useful to a user as more users enter it. What is “useful”? How do we measure the human value of a social media network? What is the difference between good information and bad information? Or too much information and too little information? What kinds of human beings is social media facilitating into being?

In this sense, the definition of useful, appears to be quite basic. Its about information moving faster from one spot in the world to another. And to be fair, politically speaking, that service should, according to certain human standards, be neutral. If the rulers of our internet world, from Mark Zuckerberg to Larry Page to Jeff Bezos, took an overt active role in politicizing their platforms to be “useful” in other ways, the long-term repurcussions of that would be potentially dictatorial in the long term. So we cant have that. But this leaves us with a platform of paradoxes.

It is no wonder then that people feel lonely when they use Facebook. Its ironic.

Intimacy in a Post-Social World

Many of us likely have a friend who has either deleted their Facebook account or gone off of it for deliberate extended periods of time. The diminishing returns are palpable. The oversaturation of social media noise makes (some of) us want to turn off completely. With social media as the dominant form, with its notification-checking and dopamine-inducing effects, it is harder for people to have intimate authentic exchanges. The world is not real unless its documented and uploaded to the cloud. It is the era of clouds. The clouds you upload to and the clouds you wade through.

The rise in offline groups, one-on-one messaging, private clubs (or networks) for millennials, etc. is only the beginning of a backlash to the cloudy world we live in. In a stressed out, overly-connected world, people dont want real connection and sometimes were unable to know what that is or even give ourselves those moments of quiet and boredom to find them. We can only react in conversation or tweet in frustration. But I think we’re seeing the beginnings of a movement in the opposite direction. People are fatigued as they hit their personal saturation point with the diminishing returns of their social networks.

The Service We Do for Future Humanity

Despite the diminishing returns, the paradoxical isolation, and how beholden we are to devices and internet accounts, there seems to be a small saving grace to all of this internet activity. History repeats itself, as we know. And as we manifest and project our old and new values into this technological ecosystem, it becomes a mirror for us. And it also becomes a mirror for the future humans. In 50 to 100 years and onwards, if we preserve all of our data, it will be the most rich picture of humanity we’ve ever created as an aggregate. And that set of rich data only gets better as the technology to record and preserve it gets better, while the need to record it exponentially increases.

The recording of every moment of every human, privacy notwithstanding, will redefine history as we know it. Think about it. When you read history books that cover events that happened just 100 years ago, we barely have any pictures of the people of that time, and only some recordings of what they thought. You go even further back and historical recordings are dominated by only the most significant voices of their times. Today, we have an unprecedented democratization of history. It’s possible that in the next 100 years, we will have a picture of every living human on the planet. I envy the humans of the future for the data we are giving them.