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Reverse Network Effect with Scale and the Impact on Internet Companies

Network effect is a crucial factor in the Internet economy. However, for those social networking companies like Facebook, twitter or LinkedIn, network effect is also a two edge sword. Network effect may also hurt internet companies: as new people join, others are motivated to leave. It is called reverse network effect.

In the passage written by Bernard Lunn, he introduced reverse network effect and its effect on internet companies. As he described, there are two types of social motivations in the real world. One is “I want to communicate better with the people I already know and trust”. The other is, “I want to increase my visibility so that I can connect with more people.” Both of these motivations have clear constrains. There are only limited number of people that you can really know and trust, since it takes time to know and trust people. When on the social networking site visibility goes beyond a certain number of people, it becomes no more social than broadcast media or spamming. For example, Author raised eBay as a classic example of a network that lost its community spirit after reaching a certain scale.

For a social networking site, although its value as a business grows as more uses come into the network, users do not benefit when more strangers join. So it is very possible that the network effect has a natural plateau. He presented the following theory: “In a social network, the value for existing users of a new user joining the network plateaus once users have most of their own contacts in that network.” The plateau is very likely to turn into a downward slope depending on the monetization strategy of the social networking site. If these businesses get too eager to monetize, they may create the reverse network effect and lead to a decrease in their user base.




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September 2012