Greg Linden’s eBay, scammers, and self-governance brings up a good point. . . that the whole idea of community contributed value (content, commerce, social, etc) scaling infinitely is somewhat of a myth.

There was a time in my life, that I looked at eBay’s buisness model longingly (5 years ago before I joined) and thought that if one day we could just achieve critical mass, We would be PRINTING MONEY and I could just retire and watch the zero’s grow . . . boy was I wrong. . .

Yes the margins are great, better than the traditional one-to-many business models. But it does bring up a whole slew of other unexpected issues that threatens to negate network effects . . .

Here is a simple test that almost all company fails . . . if value added for a company is truly networks effect driven the difference between its cost of capital and ROI should increase ALMOST exponentially and infinitely. Put it another way (without stupid finance speak) Gross Margins should not only increase infinitely but exponentially as well. There not one company on this earth that has done this yet . . .

Even Google has seen its margins decrease and cash flow growth slow; further more, as much as people think Adsense/word is this self sustaining monster, there are thousands of cute/hot/buffed Stanford undergrads doing menial adwords tech support/filtering/placement etc . . . . just for a chance to date Larry (ok low blow . . . but mommy and daddy didnt mortage the house and get you into Stanford so you can attach one of the phone headsets to your head all day) .

Myspace is just beginning to run into this issue as well. To police its community it hired a Chief Whatever Officer to safequard the community from . . . itself . . .

Digg, with the whole issue of selling ID, digging for money etc, will eventually discover that there are certain things algorithm cant solve for and people will be needed to handle the exception cases.

I guess the summary is that nature has a way of finding balance. . . no one organism or company can grow unchecked forever. . . eventually the very thing that made it successfull will created some sort of negative externality and brings balance back into the world. (hmm isnt this in the pre-amble to Star War VI?). . . eBay with trust, youTube with hardware costs, MySpace with sex, and Google with too many Stanford undergrads . . .

If network effects can creat a platform which enables certain drivers to create value exponentially it can just as easily enable other drivers to destroy value exponentially.