At first glance, it makes a lot of sense to classify Facebook has having unbounded network effects. That is, each additional user creates a positive externality for every other user. But is this really the way Facebook works? Scott Karp argues, in a Digital Media Wire article, that Facebook is a kind of free-for-all, which rests on the assumption that one giant social network can fully serve the needs of everyone. And this assumption may be wrong. Sure, one could argue that once all of your friends have joined Facebook it doesn’t really matter how many other distantly-associated people join; if they request to be your friend you can easily just ignore them…no big deal. However, I think many can attest to the fact that the openness of Facebook has its disutility.

It seems like Facebook (and other social networking sites) have a unique limitation, which does not apply as readily to other forms of networking such as fax machines. The key difference is that fax machines don’t really come up against the challenge of exclusivity the way that Facebook does. Exclusivity seems to be an elusive quality of online social networks. To quote Paul Saffo (as Karp does): “The value of a social network is defined not only by who’s on it, but by who’s excluded.” Does this mean that Facebook cannot grow indefinitely?

An article in the Economist also takes up the argument that as Facebook grows beyond a certain size it may diminish in value. In fact, the advertising system on Facebook will probably never be as huge as the one on Google simply because the advertisements on Google are being viewed by searchers who have specifically requested that information whereas the advertisements on Facebook are projected to large hoards of very different people who, in aggregate, could not care less. This article points out that we may be overestimating the usefulness of Facebook in eliciting the “social graph”. It argues that people naturally want to form their own somewhat exclusive social networks; they do not want to be “spammed” with friend requests from random people.

It’s interesting to think about the implications of this thinking. It suggests that there might be plenty of room in the market for new and varied online social networking sites.