Network Effects? Not anymore.
This article talks about how contrary to popular belief, “network effects” may not be as significant as portrayed. Firstly, “network effects” is defined by economists to describe where a service/good offers better, increasing benefits the more users it has. The article uses Slack as an example, which is a familiar app within us students. The more users the application gets, the larger the user base is, which means the network is larger, it is more attracting for new users, and the effect of a message, reminder, or notification on the application is larger.
However, Catherine Tucker takes a different, changed idea and proposes that network effects do not work as they used to. One argument is that today’s network effects are not tied to a specific hardware, like a phone or desktop computer, because we have so many different devices available to us today, like smartphones, tablets, digital assistants, etc. This results in a separation between network effects and a particular hardware, which was the case in the 90’s. Instead of hardware, network effects focus mostly on digital means, like social networks and applications, where it costs little for users to be a part of the network.
Competition is also another factor effected by this change. Thinking about driving services like Lyft and Uber, users can very easily install both apps and judge in the moment which is cheaper, and likewise, drivers who drive for both apps also judge which platform is offering them a more profitable ride. This shows that the network effects seen in today’s society really only work if the product is “sticky”, meaning customers would still need it. If customers can all leave tomorrow, there would not be future competition advantage.
link: https://hbr.org/2018/06/why-network-effects-matter-less-than-they-used-to