How strong Network effects are on Web, Software, etc.
As people works on web-based tasks more, the Network effects become huge. Before starting the contents, let’s briefly review what the network effect is. The definition said, “A product displays positive network effects when more usage of the product by any user increases the product’s value for other users.” To be specific, the more people use a product, either value or impression of the product becomes popular and positive. Thus, it gets more higher reputation to unknown people. There are some types of network effects.
- Direct Network Effects – It is the simplest case among effects. Direct Network Effect increases in usage lead to direct increases in value. For example, the old telephone service is a good example.
- Indirect Network Effects – This is a little different with the first effect. A network effect can be indirect, and the production of increasingly valuable complementary goods because the increased in usage of the product.
- Two-sided Network Effects – This means that an increased usage by one set of users increases the value of a complementary product to another distinct set of users. For example, Airbnb and Uber shows this effects. The more users do not necessarily improve the application experience, but it attracts more other people who can improve the application.
- Local Network Effects – The microstructure of an underlying network of connections often influences how much network effects matter. For instance, a product shows local network effects when each person is influenced directly by the decisions of only a small subset of other users.
In modern days, Google and Facebook are represented about the network effects well. When Google started their service, they tried to find the issues of existing searching engine and released without the problems, so a lot of people changed their old searching page, even their first page too. This helped Google became popular and stronger. Likewise, Facebook is one of the most popular and largest social network service pages in the world. It started as a small student social web page for students in Harvard. Mark Zuckerberg noticed this was a good social method, and he updated by sharing a student’s own moment and expanding to near schools. After both founders got the idea and released their services, Google and Facebook became super popular and had a lot of users who could display positive effects to other people. Thus, provider meets user’s needs, and users accomplished provider’s expectation. Due to these two factors, the network effects could play a big role for both companies.
There is another example in software field. A good example is Microsoft Windows and Office suite. People can choose operating system for their own computer among Windows, Unix, Linux, and Mac OS. In order to use Mac OS, they have to buy Apple’s computer, so this option is not considered by general users. The recent data showed Windows is still dominating the market over 80%. Why people mostly use MS Windows? When the first personal computer was commercialized, Microsoft did not have a huge computer manufacturing line, so they asked other company to install their software and get some incentives. Once Windows became a main stream of operating system, Microsoft introduced several helpful programs such as Word, Excel, and Internet Explorer. At the moment, people had no various options, so they had to use those installed programs. As more people used computer, the software of Microsoft became a standard to most people. This is a part of network effects.
From the two examples, it is possible to review what the network effects is and understand how it influences on people. In our society, many companies and business fields are using network effects to be popular or get advantages. If they use the effect well, providers can reduce the advertising cost and have more data to feedback their current service to make it better. However, there is a warning from one writer. She said a big network may fall even though it has really big and dense connections. This is because people can lose their interests in the big network if they are old users or found the network does not lead a people’s trend. Those who have a plan to use network effects should keep that in mind.
Source
[1] http://onstartups.com/tabid/3339/bid/205/Understanding-Real-Network-Effects.aspx
[2] http://www.businessinsider.com/network-effects-2011-5
[3] https://www.wired.com/2012/05/network-effects-and-global-domination-the-facebook-strategy/
[4] https://www.bloomberg.com/view/articles/2015-10-08/facebook-is-big-but-big-networks-can-fall
[5] https://www.netmarketshare.com/operating-system-market-share.aspx?qprid=10&qpcustomd=0