A Social Network is Worth Precisely as Much as Its Community

What to do when the factors of production, that element crucial to economic success as defined by none other than Karl Marx, are pretty much outside your control?

Welcome to the world of social media entrepreneurship.

The world has been full of stories this year about good intentions gone bad. Facebook, Digg and a host of other concepts that were supposed to change the essence of commerce have gone wobbly. VCs and young tech titans, dreams of sugar-plummed Maseratis dancing in their heads, have had to re-boot.

But maybe the tale is neither as grim as all that schadenfreude would have us believe. The issue, as Alexis Madrigal explains in the following article, is not so much that analysts and investors forgot about the network, but that they misinterpreted the nature of its power and, therefore, its impact.

What does 'the worth of a community' constitute? In the New Wealth of Nations, an analysis written by the World Bank in the 90s, that meant for the first time that things like locomotives and power plants were being supplanted by other things like people and their education and the rule of law. Factors of which economists were aware but that many took for granted as immeasurable.

We now accept the impact of intangibles, even if we are unable to agree on a means for identifying, codifying and measuring them. But if there is one thing we hominids can do, it is learn. And what we are discovering is that control is an outdated concept. Leverage, yes. Influence, sure. But our impact is ephemeral and too often fleeting. Facebook, Digg, MySpace and a host of their fellow travelers identified the basic power of the electronically-connected network. They just havent figured out how to make a living from it.

Different communities have different kinds of value. Some are financial. Some are cultural. Some are altogether different. Our next major challenge is figuring out which is which. People are working on it. Someone will get it. It's just not clear who or when. And there may be value in knowing only that. JL

Alexis Madrigal comments in The Atlantic:

A social networking company is not a technology company like Intel is a technology company; its users are its product.
Digg has been sold for the astonishingly low price of $500,000 to Betaworks, the Wall Street Journal reports. There are sad things about this and there are funny things about this. This sale, along with Facebook's IPO and Reddit's spinout, marks the end of the first era of social media.

It is easy to forget how high-flying Digg once was. Digg was supposed to be the future of all media, not just social media. People were going to rule the Internet; people were going to curate the web. Down with gatekeepers! But, as many Digg users quickly discovered, new gangs of gatekeepers kept a tight grip on the site's story flow. These guys played the Digg system, often with a mix of social and monetary motives, and Digg never figured out how to incorporate their power users into their community without giving them all the power.

Here was the huge problem with the Digg system. People submitted stories that were nominally voted up or down. But those stories didn't get more traffic linearly as the upvotes flew. No, you only got a bunch of traffic if the algorithm selected the story and sent it to the front page. This meant that trying to "pop" stories on Digg was like playing NBA Jam with hotspots turned on. The same amount of effort sometimes yielded 12 points and sometimes 2 points and most often 0 points.

The only way to consistently get stuff on the home page was to work at it like a job. And so, some people began to work at it like a job, and then it became their jobs. While some really thought of themselves as an important part of the journalistic enterprise, many others contracted out their services to entities of all kinds. Stripped of any institutional sense of editorial ethics, many Digg power users ended up promoting all kinds of crap along with good stories from legitimate writers and sites.

Meanwhile, everyday users were realizing that nothing they submitted ever even had a chance in hell of going to the front page. They weren't empowered netizens visiting from the future, but chumps who were being played by Digg and a bunch of "social-media consultants."

In short, the community broke. And the community, remember, is also the content machine. Without that, Digg was revealed to be just a bunch of computers waiting for people to add value to the thin offering of a social network. The site still gets a substantial amount of traffic, but that Myspace/Friendster smell of death hangs in the pixels.

There is one clear lesson from Digg's sale: the technology that powered a once-massive social network is worth about $500,000. All the rest of the value derives from the people that use it. Though scaling is tough, any developer in the world can build some profiles and let people connect up. It's an act of genius -- or an act of God, by which I mean luck -- to design a site constitution that makes people want to build their online lives at your URL (or in your app). Social networking companies are not technology companies as much as they are community companies.

To be honest, I don't know why anyone tries to start these things. No one has much of a competitive advantage, the space is crowded, you can't compete on price, and no one wants to join a Reddit for hermit crabs. Then I remember how social networks function: users produce the product and they *are* the product. Now that's some kind of good hustle.