What's Your Y?
It might be because my employer is a major Telco, but I think a lot of about networks, network effects and why they are aren’t sufficient to sustain a business. The interesting thing about network effects is that they are hard to start but once they get going, they’re the best marketing — free and scalable. Network effects are important, but they’re not a moat and that’s a key distinction. Network effects can unravel as fast or faster than they were spun up. A flywheel can spin both ways if a company isn’t careful.
A moat is different than a network effect in that it typically requires sustained investment in the moat, never achieving a flywheel. That sustained investment is necessary because it keeps you close to your customer or user’s needs, defends your business and is hard to assail because it requires significant investment of resources and time.
Amazon’s ecommerce business is a prime example of this type of business. Telcos are another example, all though they combined economic moats with a network effect. The worst place to be is network effects business without a moat. This is the place that Snap Inc. finds itself today.
Snap is a pure network effects company whose path to monetization and sustainability is precarious because 1) the path de jour is dominated by Google and Facebook/Instagram and 2) the previous path of network subscriptions (think Telcos) is not en vogue.
Snap is an “experiences” company, not an attention company. Long term, monetizing eyeballs will be a losing strategy. Snap has to monetize the experiences it provides its users. Whether that’s AR tomorrow or hardware in the not-to-distance future.
I wonder if the path to Snap’s success looks more like Telcos of the past and less like Duopoly that may and may not be destroying our democracy. You don’t beat an incumbent by doing X when an incumbent’s business is optimized for doing X. You beat an incumbent by doing Y, when Y is more valuable than X to the end user. Snap needs to find their Y and leverage their network there. That Y certainly won’t be AR alone, Apple will likely dominant that space with Android following close behind.
If you’re losing the game, you need to change being played. I’m not smart enough to see what that new game is, but maybe Snap is. Snap doesn’t have much time to figure out its Y. Going public early only sped the clock up.