T.J. Prebil

The Multiplier Effect

To date, the value of television, radio, periodicals and websites has been measured by viewers, listeners, subscribers and visitors, respectively. Superbowl ads run at a premium because of the anticipated number of viewers.

With the rise of “Web 2.0” and social media, however, a new valuation standard has emerged, something I refer to as the Multiplier Effect. The Multiplier Effect suggests that the value of an interactive media property is a function of both the number of total users and “relevant” connections each user has within a particular service.

Let me digress for a minute. Before the rise of the internet, a concept called the Network Effect was used to describe products or services that became more valuable when adopted by greater masses of people. As noted by Adam Penenberg in his book, Viral Loop, a Network Effect occurred when the telephone was introduced. “The more people who own a telephone, the more valuable an added line is to each person already on the network.” The same is true today for eBay and many online social networking sites.

But what’s unique about networking sites, as compared to eBay or telephones, is the potential for an exponential variable called the Multiplier Effect whereby the value of a property grows both by the number of users and by the number of “relevant” connections.

For example, eBay, with millions of users, has built a significant competitive advantage as a result of a Network Effect. It would be nearly impossible for another organization to compete with eBay. However, since eBay buyers and eBay sellers only connect, communicate and transact when a purchase occurs, no “relevant” and ongoing connections exist. Sure, there are some exceptions.

On the other hand, take Facebook. With over 300 MM registered users, who use the service to interact and communicate with “relevant” connections, the company benefits from both a Network Effect and the Multiplier Effect which, in my opinion, adds tremendous value to the service.

Let’s assume that every Facebook user is connected to 75 other people within the site. Where traditional media valuations and the Network Effect bases Facebook’s value is on the total number of users (300 MM), the Multiplier Effect argues that, because of exponential compounding, Facebook is actually responsible for facilitating 22.5 billion 1-to-1 relationships (300 MM x 75 connections).

When I worked on founding a business called LifeFuze – an idea similar to Facebook that never officially launched – the Multiplier Effect was used to gauge the potential value of the service.

One could argue that MySpace also benefited from the Multiplier Effect. And it has, but MySpace, and others (e.g. Classmates), focused too much on niche (e.g. school connections) or loose (e.g. bands) affiliations. As a result, this impacted the percentage of “relevant” relationships that each user established on these services.

LinkedIn and Twitter both benefit from both Network and Multiplier Effects, and I’m sure other services will continue to emerge. I, for one, think there’s a lot of potential to create a Multiplier Effect for business-to-consumer relationships, which consists of far more than simply “friending” or “following” on Twitter or Facebook. Side note: I still have a few ideas so, if anyone happens to read this and is interested in learning more, send me an email.

How to monetize the Multiplier Effect is tricky and I don’t have any clear answers or suggestions. What is clear though is it’s no surprise that Facebook is where it is today. By focusing on relevant relationships, the service continues to benefit from a Multiplier Effect.

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