Over the tipping point

The BBC reports today that Louise Mensch, an MP in the UK, has launched a “rival to Twitter”.  Mensch herself argues that it is not a rival, but instead seeks to be somewhere where discussion is kept in a broad topic, unlike the free-for-all that Twitter represents.

Many have argued that the site is too similar to Twitter, and that existing fora render it pointless.  The main difficulty that the site will have, however, is not in defining its niche, but rather in gaining users.

Social networks have evolved over time, starting with dial-up bulletin boards, through SixDegrees and MySpace, to the current duo of Twitter and Facebook.  People return to these sites not out of a sense of duty, but because of content.  On an ordinary website, the content is created by the site owner, but the content on a social network relies on there being a significant number of users in the first place.  Getting past this point is the crucial part in Menshn’s business plan; until there are a significant number of users, there will be little content, giving more users no reason to sign up.

This is an example of network externalities; the ‘sale’ of an extra subscription improves the product for everyone.  These impacts can be seen in telecommunications networks most prominently, but also in educational networks (where knowledge is shared and developed more quickly) and other marketing and branding models.  Theoretically, for the system to reach an economically efficient level of use, each existing user should subsidise new users by the extra benefit that the existing user receives.  Of course, this does not happen in traditional networks, and usage is therefore less than socially optimum.

On Internet social networks, however, existing users do generate more revenue for the network as the membership increases, since revenue appears through advertising.  Not only do existing users see more adverts as more new users join (since they will use the site more), but advertisers are likely to pay more for a site with more users.  To the end-user the use of the site if ‘free’, though the number of adverts seen could be considered to be a non-financial cost.  As such, the externality is at least partially internalised.

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