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Frontal vs Lateral Competition

Looking at the actions that we do everyday, it is evident that the power of network effects are not to be underestimated. Of course, this is rather obvious when it comes to various social networks. If our friends were not on Facebook, then there would be little to no incentive to join at all. However, because of the strength of the positive network effects, we find ourselves logging into Facebook every day, joining various organizations, going to certain events, and even buying similar merchandise. Although these positive influences are powerful, it is interesting to note that it usually results in one primary leader in each consumer category.

What I mean by this, is that positive network effects often puts one company or service in a dominant position over the rest. For example, let’s take a look at Facebook once again. Before Facebook came into being, the social media market was dominated by MySpace. Some smaller companies, such as Friendster or Xanga, did exist, but were not so nearly as popular. However, once Facebook was created, it rapidly took over the majority of the market, and sites like MySpace quickly became history.

Given the firm hold that companies like Facebook have over the market, how would other companies ever hope to compete? One important aspect to note is that network effects block only frontal competition, but not lateral competition. This means that in order to be successful, a company should not go head-to-head with the leaders in the industry, but rather find niches alongside them. Many successful companies have turned each individual aspect of Facebook into full services. Twitter has essentially turned the status feature into a creature of its own, and now many people check Twitter to get updates on their friends and various celebrities. Instagram has taken the photo sharing aspect of Facebook, and has given it new life as well.  The success of these companies is demonstrated by the fact that many people use them in addition to Facebook. Thus, although network effects are powerful, they are not impossible to overcome. Other related companies can still be successful, as long as they do a bit of lateral thinking.

References:

1. How Strong Are Network Effects Online, REALLY?
http://www.businessinsider.com/network-effects-2011-5

2. Overcoming the Network Effect Barrier
http://www.virtuosimedia.com/business/startups/overcoming-the-network-effect-barrier

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