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The Network Effect helps Startups

This article wonders why internet based companies grow so fast (in money, and users) without big marketing budgets. One of the most interesting examples is Hotmail, a free mail service, which was created in July, 4, 1996. Surprisingly, Hotmail, with only 50,000 dollars invested in marketing, and a really bad launching date, (most marketing was revolving around independence day)  happened to grow so quickly that in less than 6 months they had reached 1 million users around the world. Even more surprisingly, in that December, only 6 months later, Hotmail was sold to Microsoft for 400 million. Another example is that of Third Voice, a company that allows you to put posts in any web page where the webpage has no control whatsoever on what is posted. By the third year, Third Voice had reached a total of 7million users. These fast growing startups show the game changing that internet has brought to the world by easing communications and thus creating a one, all powerful network. A power called the network effect.

The question however is why is this network effect so powerful? How come companies like Hotmail that get big so quickly and with so little investment in marketing? The answer is that the tight network created thanks to the internet allowed for a new type of marketing: viral marketing. Viral marketing, does exactly what its name suggests, it spreads message the same way that epidemics spread viruses, from person to person. In the case of Hotmail, every email that was sent would contain a small message asking the recipient to join the service, as history shows, this proved to be incredibly efficient for many reasons. First, because the marketing messages came from a friend of yours, someone you trust, therefore the marketing messages carried an extra power. Second, because of the way social networks are structured, it would reach people in an exponential fashion, thus reaching people at speeds only seen before by the way an epidemic spreads around the world.

I thought this was an important example to mention because it shows the power of networks in this modern world. It illustrate the powers that underlies within the structure of networks, which allows messages to travel faster than ever. And it further shows the power that underlies in the strong bonds of within network, which make messages more persuasive and thus stronger.



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September 2012