Wednesday, November 5, 2008

Networking Pays off on Income Levels

Networks Have Economic Value

In economics and business, a network effect (also called network externality) is the effect that one user of a good or service has on the value of that product to other users.The classic example is the telephone. The more people own telephones, the more valuable the telephone is to each owner. This creates a positive externality because a user may purchase their phone without intending to create value for other users, but does so in any case.

The expression "network effect" is applied most commonly to positive network externalities as in the case of the telephone. Negative network externalities can also occur, where more users make a product less valuable, but are more commonly referred to as "congestion" (as in traffic congestion or network congestion).

Over time, positive network effects can create a bandwagon effect as the network becomes more valuable and more people join, in a positive feedback loop. (Source WikiEnclopedia).

Social Media Network Linked In Proves Value

Research findings by Anderson Analytics confirms what everyone already

* Nearly 60% of users have incomes of $93,000 or more.
*Executives with an average income of $104,000 make up 28% of the 2,000 random users polled for the study. Another 30% are self-identified “consultants” with an average income of $93,000.
*People with lots of connections tend to make more money, according to the study - those with incomes between $200-$350k were seven times more likely to have at least 150 connections than lower income users.

The study segmented users into four categories: executives (28%),
networkers/consultants (30%), late adopters (22%) (not sure what this is) and “exploring options (20%.

Does this mean we need to stop wasting time on Facebook and MySpace. If one adds a couple of hundred connections, does this mean they will be earning $350K plus.

When people join the network, they are given more options than simply connecting; the network is worth the sum of associations and actions that are allowed in the network. We must instead think of network value in terms of a network effect multiplier, as the actual value a network adds to an application is under the direct control of the application designers.

flickr Value

Flickr is a socially-enabled application built around photographs. Stripped of flickr's social tools, the service would provide a core value to its users - it would be a very high quality image host and archive. This core value is the "real" economic value of the product; this theory is consistent because flickr users have proven willing to pay for their services.

Flickr is also a socially-enabled tool, allowing users to connect around photographs. The social actions that can be taken in flickr are fairly limited; comments, page views, connections, groups and pools - these are fairly "commodity" social tools (in a sense, all of the social actions are native to the users as they have been previously pioneered). This is lightweight social networking, with very low barriers of entry; the network effect is light as well. To understand the final value of flickr, we multiply the core value by the network effect value (the network effect multiplier).

Facebook Value

As a contrast, consider Facebook. Facebook's core value is quite low. When you log onto Facebook you get a profile, a message box that doesn't interoperate with the rest of the world, some limited image hosting, etc., some downloadable widgets, a fun wall, etc. However, the network effects of Facebook are tremendous. The size of the network and myriad uses of the network create a network effect multiplier that is much greater than flickr's.


As social networking becomes commoditized, as more and more sites make social a part of their experience, the value-add of embracing social will need to be quantified. The key to understanding this is knowing that the value provided by the network is variable, and the outcome value of the service is contingent on the core value and the network effect multiplier.

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