Thought useful to fully define the term Network Effect being used to describe certain economic realities in cloud tool world.
From Wikipedia:
In economics and business, a network effect (also called network externality or demand-side economies of scale) is the effect that one user of a good or service has on the value of that product to other people. When a network effect is present, the value of a product or service is dependent on the number of others using it.
The classic example is the telephone. The more people who own telephones, the more valuable the telephone is to each owner. This creates a positive externality because a user may purchase a telephone without intending to create value for other users, but does so in any case. Online social networks work in the same way, with sites like Twitter and Facebook becoming more attractive as more users join.
The expression “network effect” is applied most commonly to positive network externalities as in the case of the telephone. Negative network externalities can also occur, where more users make a product less valuable, but are more commonly referred to as “congestion” (as in traffic congestion or network congestion).
Over time, positive network effects can create a bandwagon effect as the network becomes more valuable and more people join, in a positive feedback loop.
Then there’s this story on Network Effect by the Economist which is not about “The Network Effect” per se, because it’s talking about human networking at conferences…sort of like Kris’s Poker Ice Breaking Game.
But networking at conferences is also subject to “Network Effects”… in that if one can maximize useful contacts, one will increase the value of those contacts, because it’s more likely that one would be gold, as opposed to just data on hand.
What Linked In is based on. What aggregating data is all about. What PSA “Best Links Ever” is trying to do. Curation, or making latent value apparent and accessible in a network. So apparently there’s a number of different concepts floating by when we use the term “network effect”.
[gview file=”https://publicservicesalliance.org/wp-content/uploads/2015/06/The-network-effect-The-Economist.pdf”]
This “Network Effect” has been around prior to cloud tools, but massive online connectivity certainly exaggerates the impact. Previously platforms ruled, in that developers would happily develop new products for your platform if that user base was substantial or growing fast. Or the opposite would occur if you were small or slumping, no matter how superior in every way your app or product might be.
Today, things are even more complicated….hardware and OS platform constrictions seem less applicable as much simply rides on “the internet”. But now Internet platforms like Facebook have gotten big enough to discourage development on other platforms with small or non existent positive network effects. This is what Gary is referring to, afaik, when he describes barriers to viable business plans for the #2 in the cloud tool market.
Be interested to hear what strategies are being contemplated; there’s a lot of scrambling in various media creation and distribution markets to find just the right partners. But it’s also still possible to create a new “field” or dramatically change an existing field. Or hitch a ride on a well established market leaders coattails and ride up the mountain that way.
IE for Microsoft was technically behind Netscape whose market share and network effect seemed unassailable. But MS found a way to insinuate their browser into the market through association with their other dominant products, along with some dirty tricks with the OS code. Later, their attempt to do something similar with Bing vs Google, fell far short.
And regulation will continue to play a big role going forward, as “platform dominance” becomes more circumscribed in the telecom world, and more “net neutrality” is manifest. Presumably. Or perhaps hopefully. Yet the network effect has it’s plusses too, in that standards are needed to promote efficiency.