A key principle behind network
economics is network effects: “for some kinds of decisions, you
incur an explicit benefit when you align your behavior with the
behavior of others.” (E&K, p. 449)
I always thought these network effects
were of the utmost importance; for example, we see Facebook, which
people use because everyone is using it and thus it becomes an
outstanding way to stay in contact with friends. We also see
LinkedIn, “The World's Largest Professional Network” where as
more people become connected via LinkedIn the more important it is
for others to also join as they can be connected to other
professionals (currently the number of LinkedIn users is 135 million
(Wiki) which I think is rather amazing for professional networking
online) (By the way, I am not on LinkedIn or Facebook!) . However, I
came across an interesting article by Pascal-Emmanuel Gobry, which
got me thinking, “How Strong are Network Effects Online, Really?”
In his article “How Strong are
Network Effects Online, Really?” Gobry states that “one way that
network effects can be defeated is through … "verticalization."”
By the term “verticalization” Gobry means that services will
build “niches” in specific verticals. Take for example Facebook,
which perhaps reaps most the benefits of network effects. Although no
one has supplanted Facebook via a new full-blown social networking
service, “plenty of apps are taking specific use-cases of Facebook
and turning them into full-blown services.”
Gobry gives the examples of Twitter, which made the “status-update”
feature of Facebook into its own service and Instagram, which is a
way to instantly upload photos (it is based of the photo-uploading
feature of Facebook). Although Facebook is still going strong, it is
undeniable that more people are using Twitter and Instragram and this
could potentially detract from the amount of users in Facebook
(according to Gobry). From my personal experience, I have seen many
people beginning to use Twitter and Instagram (it is true that the
market for these services are growing) but however they are still on
Facebook as well … I just cannot believe that these services will
supplant Facebook! In his defense, Gobry does
not believe “that Facebook is going to crash tomorrow or that
Twitter will "kill Facebook" or any of that crap. The point
is to say that online network effects are probably overhyped.”
Gobry
also argues that
“online
network effects are strong barriers to entry to FRONTAL competition
but not to LATERAL competition.” By this he means, using Facebook
as an example, that if Facebook in its early development had focused
its attention toward MySpace users (Frontal attack) it would have
never have taken off. “Instead Facebook targeted a population that
was less into MySpace, attacking laterally--and won.” The point of
this analysis is that “Facebook won through superior execution and
lateral attack at least as much as network effects.”
Personally,
I do not believe network effects will be defeated by
“verticalization.” Gobry does not say this will happen but he
does believe this is a possibility. In fact, I believe services
reliant on network effects and services reliant on “verticalization”
will co-exist, i.e., Facebook will not suffer as a result of
Twitter/Instagram and vice versa; people will use Twitter and
Instagram for specific functionalities but they will still need
Facebook to stay in touch with all their old friends; I believe that
Twitter and Instagram are not in competition with Facebook but they
are essentially “separate markets.”
However, I do
agree that “superior execution” is just as important as network
effects. Had Facebook directed their attention toward music group
(apparently guitar players and band members were huge fans of
MySpace) I do not think they would become as big as they are today
whereas by initially marketing to people who were not ardent users of
MySpace, they really “took off.”
Anyways, what
do you guys think?
“How Strong
Are Network Effects Online, REALLY?” by Pascal-Emmanuel Gobry
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