Probably the most interesting thing to emerge out of all this investment in the creation of social media business models based on Metcalfe’s Law is it has created a new kind of financial alchemy similar to the fractional reserve banking model that has devoured the US economy over the past 40 years.

As you may or may not know fractional reserve banking is the “miraculous” technique by which a $1 issued by the US Federal Reserve ends up becoming $10,000 in the shopping malls and on the high streets of downtown America. We see similar economics in the valuations for the flagship social networks and social gaming platforms (i.e. $100+ for each member on the network) and the real level of economic activity across the Freemium model (i.e. less than 1% are engaged enough with the service to pay). Add these two trends together and we discover the valuation of the network “miraculously” converts each of the ‘active’ members into a $10,000+ valuation.

No wonder investors are excited. Social networks are fast becoming the next generation Federal Reserve.

Metcalfe’s Law is now what about 30 years old? Some 20 years before that another great theorist, Marshall McLuhan (Who is coincidentally would be 100 years old today if he was still with us) had some rather more radical and arguable more prescient ideas about the future of communications.

Best known for his the “Medium is the message” McLuhan is probably lesser known for his ideas about how the real challenge that will need to be faced in the future will be time.

As McLuhan once said: “For tribal man space was the uncontrollable mystery. For technological man it is time that occupies the same role.” - Paul Miller Dead Simple: Marshall McLuhan and the Art of the Record

You see Metcalfe’s Law was, and still is, merely an iterative qualification to a problem that had already been solved ( i.e. The shrinking of distance between the author and the audience). Radio, TV and the Telephone had already removed the barriers to distance. Metcalfe’s law merely described the speed by which the democratisation and commoditization of that activity would happen when the technology evolved to the point where it allowed it to happen.

The golden key to the new era of media and communications (as McLuhan suggested) is time and the future belongs to those who can do for time what fractional reserve banking practices have done for money supply.

This I think in the end is the key difference between Google’s search business and Facebook’s Social Business. While Google makes time by allowing you to find answers to questions relatively quickly Facebook (along with all other media) consumes time.

The future of media and communications then isn’t about the manipulation of messages, conversations or networks. It is about the manipulation of time. In this context there is no Beginning middle and end there is just now. More importantly there is the opportunity to make now more than just now. There is the opportunity to make now^2 or better still now^now.

A future where the economic potential of Metcalfe’s Law is applied to time rather than networks.

You can probably see now why I find the so called thought leadership and fauxionary innovation coming out of Silicon Valley so redundant or a the younger generation would say “So Yesterday”.

Both the Dot.Com and the So.Me are little more than the next logical step in the evolution of 2-D print into hyper media via desktop publishing and word processing. A 15th century media construct repackaged into an electronic wanderlust. So despite all the hype generated by the thought leaders in Silicon Valley, the web was never going to be the future of media. Just some mutant offspring from the collision of paper with databases and telecoms. This is also why, if we continue to think of the future of mobile media being little more than the web optimised for viewing on the mobile phone, it will be a travesty and a lost opportunity to create the first new media channel of the 21st Century.

What makes the mobile phone infinitely more exciting than the web or the personal computer as the future of media (as opposed the future of media creation which is what the PC was back in the 1980′s and 1990′s) is it represents the tipping point where the electronic 3-D experience of television and video games becomes an 4-D^2 experience.

Why 4-D^2? well if you think of TV providing a 3-D experience (2-D Space + Time) in the digital world and then shrink that experience down into a portable device that can then be used to navigate the real 4-D world (3-D space + time) all around you then you have a revolutionary new media platform that delivers an 4-D^2 experience. Simply because it allows you to navigate both the real world and the digital world simultaneously.

The challenge though is not to imagine the Mobile Phone as the 7th Screen (i.e. the Blank Canvas of the iPhone) but to reimagine the Mobile Phone as a time wallet. A magical device that allows the owner to immerse themselves in the experience of creating and sharing fractional time.

Put simply, put aside all your messages and start thinking about moments. The challenge ahead is to learn to live and to profit in a world of “real-time” communications where narrative is all but absent. Where structured time rapidly evolves (or should that be dissolves?) into unstructured time.

This is in the end is why I suspect in this brave new world of media and communications Asia may have the competitive edge over the West. Why? Simply because the two cultures have a very different perception of time. For the West time is linear. There is always the beginning middle and end. The narrative. In the East time is more attune to the moment. Something along the lines of what we have done in the past has led us to this moment and what we will do now will determine what our future will be. Here is the West we are only just starting to come to terms with the idea that to compete in this brave new world where distance is no barrier we have to, as Albert Einstein put it, “Learn from yesterday, live for today and hope for tomorrow“.

Part 2:

So two months on after first exploring the fauxionary economics of Metcalfe’s law can we definitely say the web 2.0 myth of “the bigger the network the more valuable the network” is busted?

As we have seen before the results are somewhat mixed but a trend does appear to have emerged that social networks trend towards lower ARPU’s after they have achieved ignition (or should that be self awareness?).

Away from the analysis and the crunching of the ARPUs of the various networks my general impression is simply this. It is self-evident that if we assume the opportunity for infinite growth in the network there comes a point in the growth curve where adding extra nodes must inevitably prove to be the tipping point that sends the network heading towards chaos and once that point is reached the value of the network must decrease with each additional node that is added.

Having said that it would appear to be very difficult to pin point where that tipping point may be. Is it 150 nodes, is it 150 Million nodes, is it 150 Billion nodes or is it more?

What we do know is the realised value of these social networks only ever appears to be a mere fraction of the potential value. This in turn suggests that the Web 3.0 economy will be all about developing new and more effective methods of extracting value from these global networks.

We also need to recognise that not all the nodes and the connections scattered across the network are created equal and that the first 15 years of the web has proven time and again that some “nodes are more equal than others” and the real winners are in the business of targeting and harvesting the high value nodes that are scattered across the network.

The economic reality of the web 2.0 network business model is something of a hybrid model (as illustrated below) of Metcalfe or Reeds Law (you choose your preferred network growth model) meets Chris Anderson’s Long Tail theory in which only a fraction of the potential economic value of the network is ever realised.

Of course none of this is new. The questions surrounding the application of Metcalfe’s Law to the economics of the social network have been a topic of discussion since the birth of web 2.0 (e.g. See Bob Metcalfe’s guest post on VCMike, Benjamin Ellis’s Metcalfe’s Law really useful not, Broadstuff’s A short discussion of Metcalfe’s Law for social networks and Noah Brier’s Metcalfe’s Plateau (2008)). What is surprising is that after 15 years of collecting user data so little progress has been made in developing a new economic model that describes the economic reality of the online social network economies.

Postscript:

If I was to put a “magic” number on the potential economic value of the social network based on all the ad-hoc analysis that has been conducted over the past 18 months it would be 0.5%. Most of the engagement statistics we have encountered so far across a broad range of activities and networks (be it Meetups, Facebook fan page engagement , Zynga’s Game Addicts or Twitter advertising CTR’s ) have fallen within the range of 1 to 0.1%.

It should also be noted that Chris Anderson’s original premise for Free(mium) was a 1% conversion rate and that estimated has been mirrored in the experience of Freemium startups like Dropbox and Pandora.

What is interesting of course is if we mash together this freemium conversion rate with Jeremy Liew’s $2.8 web media modelling estimate and a $1.00 per month subscription fee we soon discover that the freemium start up would have to have twice the monthly traffic of the leading tech blog (i.e. TechCrunch @ 12 Million uniques) just to break even.

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