Network effect is snake oil. You sell the service to users by promising that their friends are (or shortly will be) using it. Once you plateau to the point where you're not adding users hand-over-fist any more the users satisfaction stops being a priority (you've essentially locked them in), and you start to make decisions that are directly against their interests.
I have no problem with any sentence except your first.
What you're describing is not what's referred to by snake oil. Snake oil is when you sell a useless product to someone; network effects are not useless. You might argue that advertisers are selling snake oil and network effects are facilitating that, but the issue is not network effects.
Snake oil is a product that pretends to be something that it is not. I think that's an apt comparison to "network effect" social services that pretend to be one thing, and then flip the script when they reach their plateau.
Have a look at Google+, I think unless people have a decent set of their friends on the service as soon as they join they are going to quickly lose interest.
Facebook has set a high bar as for lots of people they can find everyone they know. Any competing service will need to match this as well as possible with crazy early growth.
