Why Facebook Won: Network Effects.
According to Statista, there are only six companies in the US with a market valuation of over half a trillion dollars, and among the other tech giants like Google (Alphabet), Amazon and Apple, one name cannot be left unsaid—Facebook. Facebook, founded in just 2004 and having opened its doors to the public barely 15 years ago, in many respects, took the social networks scene by stop and revolutionized what social networking as we know it is. But what exactly drove this monstrous feat? Below, I allude to Nils Zimmermann’s article in Deutsche Welle’s subsidiary dw.com where he claims that Network Effects helped Facebook win.
According to Zimmermann, the chief reason behind the astronomic success of companies like Facebook is the idea that the more the users of a platform, the more attractive it is for other members to join as usability and importance is proportional to how many members actively use such platforms. In fact, according to a professor at the University of Halle, “Once a social network effect-based company gains a clear leading position compared to competitors, it becomes so clearly more attractive than its competitors that a winner-takes-all trend sets in. ” In essence, the technology space, and particularly platforms whose business models are incumbent upon user volume benefit from being a first mover—once enough users adopt the new technology(enough here being used relatively), new users are almost guaranteed to adopt it too. Of course, there are other issues to contend with such as quality of experience and cost; but in general, such spaces are, according to Zimmermann, dominated by network effects.
It is perhaps for this reason that we see companies like Facebook and Alphabet rushing to acquire smaller players in spaces that are expected to benefit from this paradigm. For example, Facebook acquired WhatsApp in 2014 as the number of people continued to adopt messaging and Google recently acquired Fitbit as millennials rush toward tracking their health and fitness on a level never seen before.
The ideas pointed out by Nils Zimmermann are consistent with what we have discussed in our Networks class so far. Particularly, the discussion on direct benefits to following crowds and the “rich-get-richer” phenomenon go hand in hand with Zimmermann’s observation. We noted that in a networked system, people’s choices of whether or not to adopt a good is dependent not only on their reservation price—how much they are willing to pay(either in terms of time or monetary value) for the good, but also on what their expectation is of other people to adopt it. Therefore, in line with this, Facebook benefitted strongly from the early traction is got from colleges during its first two years. This then paved way for an exponential growth once everyone could sign up. Ultimately, Facebook’s popularity was fueled by inherent network effects in the structure of our global communities.
https://www.dw.com/en/network-effects-helped-facebook-win/a-40418818
Graphic: https://www.statista.com/chart/10047/facebooks-monthly-active-users/