Facebook's Network Effect

Was it only two and a half years ago that MySpace seemed completely unbeatable? The combination of inexpensive content development and a huge audience seemed like the path to riches, or a least a new content development format. According to the numbers, MySpace is clearly still the dominant player in the space:

Why all the buzz about Facebook then? There is not a single stat in the chart above that would suggest Facebook is a market leader. However, when you look at Facebook’s growth over the past year, there does seem to be solid audience growth:

Now, let’s focus in on the last couple of months. Since April, when Facebook basically opened up the doors to everyone, their traffic has grown from 22 million unique visitors to almost 35 million unique visitors. During this time, MySpace has stayed relatively flat. This is interesting, but not altogether shocking. The growth of audience isn’t what I find interesting, what’s interesting is the Time Per Person:

Facebook is a living demonstration of the Network Effect; as the audience has increased, so has the usage on a per person basis. This is a remarkably difficult thing for a site to do. As most sites pick up more traffic, they sacrifice engagement by watering down their audience with casual visitors.

How strong is the Network Effect? If you start looking at the time per person and audience starting in April, Facebook data correlates at .95 and MySpace correlates at -.39. This means, roughly, that each additional person added to Facebook increases the incremental time spent (read: value) by any individual person. That, my friends, is the Network Effect in action.

The funny thing is, websites don’t normally act this way - communication outlets, such as email, fax machines and telephones do. Here’s where things get interesting, advertising via communication mechanisms doesn’t work all that well. We all hate spam, cold calls and even those little ads you sometimes get with Yahoo! Mail and Gmail. But Facebook needs to make money, right? So, it would appear that they have a problem.

This leads to the $100 million question (literally in this case) - how do you use the Network Effect to your advantage in an advertising model? Facebook has some new ad formats out there that are interesting attempts; I guess we’ll just have to wait and see.