The Impossible Economics Facing Threads

It’s 2010 all over again. Back then, the social network model was just proving viable, and suddenly we saw an explosion of social networks like fireworks on the 4th of July. Yet, few survived. The problem is fundamentally an economic one, so today I want to discuss why social network break classic economics.

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Social Network Economics

Elon Musk is a master at generating competition. No one was taking electric cars seriously until Tesla, now there’s dozens of competitors. No one was taking space seriously until SpaceX, now there’s a race to service the space economy, built on decades of economic innovations.

And after a decade of stagnation in social media, suddenly everyone wants to compete with Twitter now that Elon Musk owns it. We had Mastodon (which looks like it already failed), then Bluesky (which seems like it’s going to fail…), and now Threads (you can follow me I guess…marketpoweryt).

Competition has returned to social media, and we’re all happy!…

For economists, Competition might as well be one of our gods on Mount Oikonomics. Competition is hard to love at first because it looks like he picks favorites. But anytime someone gets too comfortable in his favor, a young upstart comes along and takes him down. Competition also doesn’t care for having one favorite to rule his domain. He’s happy with a diversity of options that each serves a specific set of preferences. He gives and he takes, but generally his blessings pour out and enrich the lives of all.

But Competition has always had trouble with another god. Networks. Networks likes to pick favorites. And any time someone tries to challenge Networks’ favorite, she rips her blessings away from the challenger. Unless, of course, you can convince enough supplicants to support the challenger, then, and only then, will Networks grant the competitor standing in her court.

Networks has always been the god of choice for social media. Facebook worked because it targeted college campuses. You could meet someone at a gathering in the afternoon, and that evening you would be Facebook friends (we had to wait until evening because we didn’t have smartphones…). Using Facebook was fun because other people were using Facebook. In fact, as more people used Facebook, it became more fun because you were more likely to see new content.

Network effects are why competition has a hard time fostering new social media companies. Would it be fun to have a social network dedicated to Stormlight Archive fans? Probably. But even though the books are popular, they are still so unknown that most people haven’t even heard of them (feel free to comment if you do know the books!). There aren’t enough fans for a critical mass.

And that makes sustaining the company difficult. Most companies outside of social media can sustain themselves from selling a product or service. The Halal grocery store in my town doesn’t need every resident to buy from them; it just needs enough customers from the really small Muslim population in the area to make sure it covers costs. But nearly all of these social networks (Substack seems to be the exception) rely on advertising. Their value proposition is, “We’ll get millions of people to see your ads.” For that business model to work, you need millions of people on your site. New competitors will always struggle because they don’t have enough users to make it fun or to generate revenue.

This is compounded by the other problem with new networks: switching costs are high. Nowadays, I rarely follow new people on Twitter. I’ve found a group of people I like to follow, and I just read what they tweet or retweet. If I move to a new platform, I have to find those people again. Threads is the third time I’ve seen followers say, “I’m leaving Twitter and you can follow me here.” I don’t have time to try and build on every social network that comes out. And once you do get over there, no one is even on the app yet. The costs are high and the benefits are low.

The economics of social media favor incumbents over competitors. This is a loss for overall welfare. It creates monopolies that provide suboptimal service and it stifles creativity. But getting over those economics is hard.

Will Threads succeed? Here is the one thing it has going with it: it has the biggest social media company behind it. But that doesn’t guarantee success. Remember Buzz? It was the social network Google launched in 2010 that was discontinued the following year. Even with all of Google’s might, back when Google was still a hot company, its social network projects couldn’t succeed. Networks scorned Competition.

Links I Liked

Racial Preferences in College Admissions Are Now Unconstitutional. What Comes Next?

• Last week I wrote about the supreme court’s decisions on higher education. One of the economists who worked on some of the cases leading up to the big case wrote his perspective on what’s next in college admissions.

Using economics to find lost cities

• This is my video on using trade models to find ancient cities. The beautiful economics in this video will shock you.

Bitcoin now available as cash

• I am in no way endorsing this product. I just think it’s hilarious that crypto is branching out into physical cash.