The Network Effect, Clusters, Bridges, and their effects on Companies
https://hbr.org/2019/01/why-some-platforms-thrive-and-others-dont
https://qz.com/1592032/how-uber-got-to-its-90-billion-ipo-and-changed-transportation-forever/
Whenever we send a hilarious meme to a friend (Facebook Messenger), book a room for a dream vacation to Hawaii (Airbnb), or spend hours tumbling down the Wiki Rabbit Hole (Wikipedia), we interact with companies and services that have made networks an integral part of their product. Since networks play an integral role in our lives, it’s easy to see how companies benefit from network effects—the more people use a good/service, the more valuable this good/service becomes. We can even use networks to examine what causes some companies to become extremely successful and other companies to end up floundering.
First of all, it is important to recognize that the strength of network effects can change over time. For instance, Windows thrived in the 1990s when PC apps were client-based, meaning that they only lived on computers. At the time, network effects worked in Windows’ favor: the more developers wrote apps for the company, the more valuable Windows became. However, the rise of internet-based apps drew some developers away, making Windows a less valuable company and allowing competitors to rise up. This example demonstrates how integral strong network effects can be to a company’s success—as Windows’ network effects became weaker, competitors were able to gain traction much more easily, even allowing Mac shipments to increase five times by the end of the 2000s.
While barriers to entry are an important point in determining whether a company succeeds, another important factor to consider is whether the company’s network consists of local clusters or a global network. Companies with a global network are much stronger than companies with only local networks. For example, Uber’s network is primarily local—users of the ride-hailing app do not care much about connecting with users in other cities, countries, or continents. This makes Uber’s network weaker and more prone to local competition. In previous years, Uber reportedly spent $1 billion a year trying to compete with local ride-sharing apps in China and India. At one point, Uber unsuccessfully attempted to cater to the different needs in these local areas, even dabbling in auto-rickshaws in India and motorbikes in Thailand. Uber’s network of local clusters is often either not connected at all or connected by local bridges, which results in very weak ties between different regions. This meant that users had no need for a global network, making it much more difficult to establish a cohesive global presence and compete with local companies.
In contrast, companies like Airbnb have successfully established more of a global network because users care about connecting with users who are not local to their area. Many social media sites also make attempts to expand from local clusters to a global network to strengthen their network of users. For instance, Facebook used FarmVille to help users create new connections with strangers and welcomed popular brands and celebrities to use the platform because of their global appeal. Facebook has been able to successfully hone the triadic closure principle to strengthen their network effects—the more friends a user has, the more likely they are to attain even more friends through mutual friends. The direct network effect allows Facebook to connect more users and provide more engaging and relevant content to users, making the experience more appealing.