network effects

There are many reasons why technology makes it easier for network effects to come into play:

-       Because tech products typically require help and advice, user communities get formed around popular products.

-       In B2B, because tech products require implementation, service providers mushroom around such products.

-       Replication and distribution cost of software tech products is negligible, so it can be made available to users for free (Facebook, Google, email)

Direct network effects

Direct network effects kick in when the increase in value in a product or a service is contributed directly by other users. Products that facilitate communication or interaction between people are said to have direct network effects.

Indirect network effects

Indirect network effects happen when the increase in value in a product or service occurs when each additional user makes it more attractive for non-user entities to make an investment in increasing value of the offering. Platforms are examples of indirect network effects.

The reason why different people take part in different networks has important implications on how fast they grow and how defensible they’re against startups and competitors.

Benefit:

-       Communication

-       Economic: If a network facilitates economic transactions

-       Entertainment

-       Information

Kind of Network:

Random network

One day you could be chatting with one person and another day with someone else

Clustered network

 Other examples of technologies that are based on clustered networks would include Facebook (you talk to your friends, mostly) and LinkedIn (you connect to your colleagues, mostly).

Small world network

A small world network is a network structure where there are lots of clusters but there are also connections or bridges between these clusters. You can imagine a small world network to be somewhere in between random and clustered network.

For a startup, it’s important to know what type of network it’s operating in and what network effects could be possible in that environment. One major factor in Facebook’s success was targeting US universities only initial years. WhatsApp succeeded because it targeted Indian-diaspora in US to communicate with family free of cost. Clusters matter!

Populations, competing products, and people’s preferences evolve over time and that makes it likely for a new product with different or enhanced use case to have a chance.

Even after a multi-fold increase in benefit from a new product, people continue using both new and old products because of other people in their network change slowly.

Facebook started by targeting just Harvard students (who live in same hostels, go to same clubs), Uber started in San Francisco, Twitter started just in one event (SXSW).

IMP : Nature of benefits that a network provides determines the behavior of people in it.

Will there be a major new Facebook competitor ? It’s quite likely (but whether it happens in 2019 or 2020 is hard to say). People are recognizing increasingly negative effects of Facebook (anxiety, privacy issues, clutter). This does leave an opening for a new network to come along. Why isn’t that network Instagram? Because Instagram is from the same company with similar values. This new non-Facebook network will first appeal to smaller but passionate clusters who feel the highest amount of pain from Facebook, and slowly spread to other clusters. In that time Facebook will try to buy or clone it. This new network could possibly start in Europe where cries about privacy are the loudest.

Yesss , I Can ....