Facebook's valuation and the network effect  JAN 13 2009

My inbox is divided about the valuation of Facebook calculated using Burger King Whopper Sacrifice promotion (unfriend 10 people to get a Whopper). The majority say that even if you prevented people from refriending those they unfriended for a Whopper, a value of 12 cents for each friend link is too high and that most links are worth much less than that. That is, Facebook is awash in junk friendships of little value.

A smaller contingent is arguing that Burger King would have to pay much more to break some friendships and that Facebook's valuation is therefore higher than the straight calculation indicates. For instance, getting Johnny Shoegazer to unfriend that girl he likes might take a considerable sum of money. I agree that Facebook is worth more than \$1.8 billion in Whoppers but not because some individual links are more valuable than others...it's about groups and networks of links. You might be able to get someone to part with 10 "junk" friends for \$2.40 but could you pay them \$22 more to essentially shut down their Facebook account for good? I don't think so. It's going to cost much more than that...and for some intense users of the site, the "buyout" amount might be surprisingly high. (I'd probably accept \$24 to close my Facebook account. But I pay nothing to use Twitter and ~\$25 a year for Flickr and it might take several hundred or even thousands of dollars to entice me to permanently close either of those accounts...I get so much value from them.)

The reason for this seems like it might have something to do with Metcalfe's Law:

Metcalfe's law states that the value of a telecommunications network is proportional to the square of the number of connected users of the system (n^2). [...] Metcalfe's law characterizes many of the network effects of communication technologies and networks such as the Internet, social networking, and the World Wide Web. It is related to the fact that the number of unique connections in a network of a number of nodes (n) can be expressed mathematically as the triangular number n(n - 1)/2, which is proportional to n^2 asymptotically.

Or for our economic purposes, the network effect:

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.

Again, assuming that we're not taking this too seriously.