Negative Network Effects and Clubhouse

Airbnb, Dropbox, Fortnite, Facebook, Whatsapp all, other than being massive businesses with hundreds of millions of users, have something in common. Their success is driven by network effects.

Network effects provide the biggest defensible moat in the digital world. Not only that, they also account for over 70% of the value creation in tech.

A network effect is when another user makes the service more valuable for every other user. Once your company gets ahead, users won’t find as much value in your competitors’ smaller networks.

Often overlooked, however, are negative network effects and their impact on users, communities, and products. 

Wait, I thought you just said network effects are great. What are negative network effects?

Negative network effects happen when, as users and product usage increase, the user experience degrades and the value to users decreases. They mainly happen in two key ways: network congestion, and network pollution.

Network Congestion

Just like everyone independently streaming Netflix at home makes your wifi slow and your streaming buffer-y, network congestion is when too many users reduce the core utility of a product, overshadow (and in some cases completely erode) the initial value proposition, and degrade customer experience. 

Network Pollution

This is when too many users leads to an overload of irrelevant or undesired content. LinkedIn is the best example of this. The wider my professional network gets, the more my feed is filled with :poop emoji: like this

These negative network effects are particularly magnified in products focusing on intimacy and community. 

Clubhouse

The early days of Clubhouse were magical. Pop-up audio rooms filled with serendipity and interesting conversations. Audio as a medium (vs. text) felt more personal and got the early users hooked. Much better than a podcast, because everyone could participate, early users were like-minded (tech community), and room sizes were small and manageable. Early network effects were powerful, driven first by the FOMO generated by its invite-only strategy and rave reviews from early users, and then by celebrity sightings in the app.

In the past few months, the floodgates opened. Clubhouse went as high as #14 on the App Store. Right on cue, the negative network effects started kicking in.

Clubhouse voice chat leads a wave of spontaneous social apps | TechCrunch
Image via Techcrunch

Watercooler conversations, but make it 100s of people?

Room sizes immediately ballooned. 10-30 person rooms now have hundreds, even thousands. This has two major effects. First, it prevents users from being able to have any meaningful participation or engagement in the conversation. In that sense, the rooms regress into live podcasts, rather than an active two way conversations. Second, the intimacy is gone. You can’t really make new one on one connections in 200-1000 person rooms where everyone is trying to get a word in. In this case, history kind of repeats itself AND rhymes. This is exactly what happens to all social platforms. They go from social networking (intimacy, connections, conversations, high participation), to social media (low participation, high consumption).

What are you even talking about right now?

The number of rooms has also skyrocketed. But it is harder than ever to find high quality conversations. The feed is polluted with irrelevant conversations. Some weird and inappropriate, some outlandish and crazy, and some straight up disgusting. Antisemitic conversations in particular have found a home on Clubhouse. And now that Tai Lopez is on Clubhouse, scam-preneurs are likely to be the next wave.

It’s not all negative. It has also given rise to creative new content formats like the live performance of Lion King by voice actors for 5000 people. It was phenomenal and extremely creative. Clubhouse is going to create a whole new category of audio first social content. To further embrace their new status as social media, they have also launched a Creators Club. Cool stuff, but the new Clubhouse just hits different, and not in a warm fuzzy way.

Value Leak

As the social “network” morphs into social “media”, the core public networking functionality starts to leak. Sometimes off the platform into other platforms. Often within private messages and groups within the platform. A classic example of this is Twitch. When it started, communities were small and intimate, fostering meaningful connections among the viewers and the streamers. As audience size grew, Twitch’s community value leaked, fueling the rise of Discord. Twitch failed to capture that value. Similarly, for most Twitter accounts, the real value has shifted off the public timeline, and into DMs. So much so, that users are willing to pay just for Twitter DM functionality. 

Platforms that benefit from network effects are also plagued with negative network effects which, in turn, disappoint your early users, modify user behavior in unexpected ways, and cause value leak. 

Clubhouse is on its way to becoming social media. Inevitably, value will leak. And Twitter is slurping that value right up — real-time audio conversations are spilling into asynchronous DMs on Twitter. What features could Clubhouse add to re-capture that value? Would someone else benefit from this value leak? 


Are you building a product that captures the value leak from a hot social media platform? Hit me up on Twitter @itsparaj and let’s chat!


The Creator Economy Chasm

The internet has given rise to the “Creative Class”. They are the 50 million people online who consider themselves creators. The kids who, instead of dreaming of becoming a doctor or an engineer, aspire for Youtube or Tiktok success. Platforms like Twitch, Substack, and Patreon have unleashed this, previously untapped, talent and passion. Not only is it personally fulfilling, but also financially lucrative. The top Twitch streamer pulls in a cool $5.4M per year, the top writer on Substack makes more than $1.2M per year from subscriptions, and an 8 year old youtuber makes over $25M per year from his unboxing videos.

But while 3.8 million people stream on Twitch, only a few manage to earn a living through it. The rest either work multiple part time jobs to be able to support their passion full time, or never make the jump to pursue their creations seriously. There exists a significant gap between being a creator on the internet, and being a full-time creator. This gap is massive. So massive, it’s a chasm, and every creator’s dream is to cross this chasm. 

Creator Economics 101

Before we dive into the chasm, let’s take a moment to understand the underlying economics of creation. In the past, content was bundled and distributed by large corporations. Want to watch high quality funny video content? Buy bundled cable. Want to read incisive political analysis? Subscribe to the NYTimes. Now, individual political thinkers and video creators can create and directly distribute their content to their fans, build their individual brand independent from that of an aggregator, and monetize their passion. There are four key business models powering this new-age media entrepreneurship:

  • The Direct Subscription Model – fans have to pay a monthly subscription to access content behind a paywall. Fans don’t pay a one time fee for a particular piece of content (like $3.99 for a movie from Blockbuster). Instead, it’s a monthly digital subscription to ongoing access to the complete library of existing and new content (like Netflix). Platforms like OnlyFans and Patreon have enabled this monetization method. It works well for any audience size and requires marketing effort to attract new fans and convince them to purchase a paid subscription, usually through teaser content. A creator charging $9.99 per month, needs 200 fans to make $2000 per month.
  • The Freemium Model – creators’ core content is free, but they upsell their hardcore fans to paid, premium content. It’s 2020 and we have no shortage of high quality content at our fingertips. Since the opportunity cost of attention is so high, most creators prefer this model. Hiding content behind a paywall stunts growth, preventing potential fans from discovering content. So make it available for free, and convince them to upgrade to a paid subscription for status perks and exclusive content. Twitch and Patreon lead the charge here. Streamers’ content is free to watch on Twitch, but subscribers get status perks such as exclusive emojis. You might think “no way perks are compelling enough to convert free fans into paid”, but successful streamers average $5000 per month in subscriptions alone. Others, like Crime Junkie, a top true crime podcast, release exclusive episodes for their subscribers, in addition to their regular free podcasts. Since only a small number of free fans convert to paid, volume is key. The goal is to get in front of as many viewers as possible. The same creator charging $9.99 per month now needs 4000 fans to make $2000 per month (assuming 5% convert to paid). While the number seems much larger and daunting, remember, it’s always easier to build a community with free content than asking people to pay upfront to join a community.
  • Creator Commerce – selling merch as an extension of their brand. This one is most effective for streamers who have built up a medium-sized audience that is free, subscription, or freemium. Here, creators sell alternative items to their fans. Merch, meet and greet tickets, books, branded products etc. This monetization channel is independent of both content and platform. David Dobrik sells Clickbait hoodies and t-shirts. Emma Chamberlain is a big coffee aficionado, and so she has her own coffee brand. Pewdiepie, who started his Youtube journey with horror video games, has a gaming chair for $399. Platforms like FanJoy, Popshop, and Shopify are powering this wave of creator commerce. However, this strategy is not always successful. Launch merch too quickly, and fans think you are a sellout. Launch it too often, and it loses its charm and hype. A creator who sells hoodies for $50, needs to make $24,000 in revenue to net about $2,000 per month. Industry standard for merchandise is a 2% conversion rate. The creator needs 24,000 fans to make a living wage.
  • Ads & Sponsorships – Sponsorships allow creators to keep their content free and charge brands to reach their audience instead. While effective and lucrative for larger creators, smaller creators have significantly lower sponsorship opportunities. Ads on the other hand, are often platform dependent, completely programmatic, and pay out creators proportional to the impressions from their audience. As a result, smaller creators get paid pennies. At $30 CPM, a creator with a weekly podcast, needs ~16,000 listeners to make $2000 per month.

As we can see, monetization opportunities are like in-game unlockable items. As soon as you hit a certain level, new ways to make money present themselves. First few fans? Subscriber revenue is now available. 10k listeners? Sponsors are now knocking on the door. 100k viewers? Red Bull is on the phone.

The Spiral of Death and the Chasm of Non Creation

Yet, most creators never even get to level 1 of monetization. They lack consistency and quality, and fail to build a meaningful audience. In the beginning, creating content is addicting. Every incremental follower is a shot of adrenaline. Soon enough, however, life gets in the way. Putting off streaming to pick up an extra shift at work. Going a few weeks without releasing a weekly podcast episode because of a big presentation at work. As consistency and quality suffers, growth stunts. Some hardcore fans, if there are any, might stick around. Others come and go. 

Everyday it gets a little bit harder to stand out and get new followers as new creators throw their hat in the ring. Even just a few weeks without meaningful growth can be demotivating. Since the audience is small, monetization is still locked. So creators work other jobs. Come home tired after work, too tired to create. Consistency and quality slips, which further makes it harder to grow the audience. This is the vicious spiral that forces creators into the chasm of non-creation and keeps them there.

This wide gap, or period in-between when a creator starts creating and distributing content on the internet, and when they start creating full-time, is the chasm of non-creation. Creators get stuck in this chasm because they aren’t making enough money to be full-time, their audience is not growing fast enough, and they don’t have ancillary support to build a sustainable business around their creations. 

NELK shows off their 23 cent earnings off of a month of 15 million views.

What keeps them in the chasm

  1. Poor Discovery – The only way to discover new content creators on most platforms is through word of mouth. Tiktok’s algorithmic feed is an exception. 
  2. Platform overdependence – While platforms like Tiktok, Substack, and Twitch help creators with distribution, they also severely hamstring their monetization opportunities. Creators are limited to the monetization opportunities available on the platform. In a landscape where monetization is hard enough, the lack of options to monetize further makes it harder to climb out of the chasm. Oh and btw, the platform is taking a cut of every transaction on the platform.
  3. Lack of audience data and off-platform engagement – Creators don’t truly own their audience relationship. I have been subscribed to Pewdiepie for 5 years. Yet, he can’t reach me on Twitter or my email and try to upsell his merch. Companies commonly use omni channel marketing to reach their biggest customers. Creators can’t because their fan data is locked into the platform.
  4. Burden of admin overhead – As if making money wasn’t hard enough, creators also have to piece together benefits and services that otherwise come bundled together with a traditional job. Making and keeping track of tax payments, health insurance, and invoices and financial management.

Creator Economy 2.0: Picks and Shovels for Creator Businesses

As creators become more like mini-enterprises, they need more tools for discovery, diversify income, engage with their community, leverage data, manage budgets and finances, get access to health insurance and benefits, and manage increasingly complex business operations. Simplifying this process of the ‘enterprisation’ of the creator would let more people join this creator ecosystem and escape from the chasm, into life as a successful creator.


Thanks to Ronnie, and Ionela for edits when half of it was gibberish.


Building software for creators? Like and comment below, tweet me @itsparaj, and email me at pmathur@bipcapital.com