Range of network effects
https://hbr.org/2019/01/why-some-platforms-thrive-and-others-dont
This article discusses the danger that many incumbent companies in a market face when network effects are a strong driving factor in their market share. Often as soon as a company’s network effect diminishes, its market share and profitability will plunge, allowing for a new company to rise. Initially, the article compares two markets: computers and video games. For computers in the early 90s, the benefit of a computer increased as the number of programs on the computer increased. Therefore, the network effect depended less on the number of people using the computer and more on the number of people programming apps for the computer. For video games, there is surprisingly a weak network effect. This is because, like computers in the 90s, the strength of the network effect depends on the games available. It differs from computers in that, the benefit of a console doesn’t increase with number of games available, but the quality of those games. If a video game console can produce one or two hit games, the market share will rocket.
The next section discussed how network effects change with market fragmentation. For example, the fact that Uber’s markets across the US are fragmented, makes it easy for a smaller company to overtake their market share in that area. In Boston, the drivers only care about the riders in Boston, this creates a fragmented market because the network effect of Uber won’t really be able to spread naturally outside Boston. The smaller fragments a company’s market is broken up into, the easier it is for another company to override their network effect.
This article was interesting because it showed how there are many variables that can destroy a once fast-growing network-effect-boosted company. Essentially, for a network to remain strong you need to have both direct and indirect network effects. Direct is where more users = more users. Indirect is where more sellers (in the case of computers, app developers) = more users. You also need your target area to be cohesive and large. If the market is broken up into many sections across a country, the network effect will never fully boost the business.