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How effective is the Network Effect? – A look at Quora

James Surouwecki’s article in the New Yorker describes the dependence on network effect in the success of most online technology companies like Facebook, Twitter and Groupon.

 “The genius of these companies is that their users do most of the work and create most of the value; once the ball is rolling, it’s the users who keep pushing it along.”

In essence, “network effect” is a phenomenon where the value of a service to its existing customers increases as more people begin to use it. When new customers see that everyone they want to connect to is already on that service, they begin to use it too, making the service itself more valuable. After a certain tipping point is achieved, almost all competition for the service is shut out because it is much more useful to be on the service with more users and it becomes impossible for other companies to penetrate the market.

While network effects play an important role in increasing the value of these companies, it is not the sole reason for their success. In fact, two of the most successful companies, Google and Amazon, do not benefit from network effects and use economies of scale. Network effect may at times also have a negative impact as too many users might lead to invaluable data on the service, leading to a lower engagement:

“The network effect allowed these companies to grow so fast, but the decline can be just as ferocious,” Mr. Sena said. “If any of them misstep with users, they can leave, and the network effect goes into reverse.”

In today’s age, customers use their Facebook, Google or Twitter profiles to join a new service. They not only provide their own personal information, but also bring their social connections with them. Thus, it has become relatively easy to achieve the critical mass needed to ensure a positive network effect. In spite of this, many companies fail to deliver the kind of growth needed to sustain users and revenue.

The power to enhance the network effect now resides in the intrinsic value of the data on the service itself. Quora primarily relies on this to achieve its success. While you can log into Quora using your Facebook profile, and your Facebook friends are automatically imported as people you are following, in the long run, it is the people who share your interests and provide answers that are appealing to you that you continue to follow. The more the user consumes information through Quora, the more efficient the algorithm is in providing pertinent information. Since more valuable information is provided with increased usage, it also increases the value of the service to the user. Thus, the intrinsic value of the service to the user also increases with increased usage.

This is the unique aspect of Quora that, according to me, distinguishes it from other social networking sites that use network effect. It would not suffer from negative network effects as much as other companies since its value to the user is dependent on the users own usage as much as it on the number of other users on Quora. Thus, while social networking sites like Facebook are likely to get impacted by anti-network effects since beyond a point, it becomes too crowded (like what happened to Orkut), Quora would not lose its quality as the information available on Quora is still equally valuable. Quora team makes a conscious effort to ensure that the quality of the community does not dilute so that the value-adding users vacate it. As a result, even though it might have a smaller user base who use the service continuously, it ensures that Quora does not get impacted by negative network effects that might affect other companies.

 

References:

http://platformed.info/promoted-tweet-facebook-twitter-social-network-revenue-model/

http://techcrunch.com/2012/11/04/the-network-effect-isnt-good-enough/

http://daltoncaldwell.com/critical-mass-vs-network-effects

http://www.nytimes.com/2012/08/18/business/Sites-Like-Groupon-and-Facebook-Disappoint-Investors.html?pagewanted=all&_r=0

http://www.quora.com/Network-Effects

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