The Importance of Network Effects in the Tech Industry
https://www.forbes.com/sites/startupnationcentral/2018/03/18/why-a-network-effect-is-the-only-way-your-startup-can-win/#1899331c7527
The technology industry is dominated by network effects. Some examples are obvious like social media platforms, but there are many companies whose entire business models are tied to network effects. Consider Uber for instance – as their driver-base grows, it creates better value for a prospective user; as their user-base grows, it creates better value for a prospective driver. If you really stop to think about how users interact with a platform or new technology, it becomes apparent how universal network effects are in the technology industry. And the article makes it clear that this isn’t a coincidence.
This article obviously ties in to our discussion of network effects in class. We discussed how to reach a stable equilibrium and how powerful that can be. A great example the article draws upon that demonstrates this is Facebook. Facebook naturally generates a lot of traction with respect to network effects because of how widespread it is as a social media platform. So much so that even Google and Microsoft, which are used in some form on nearly every computer in the world, couldn’t compete with Facebook. This is why Google Plus failed and why Facebook is still as strong as ever. It would take a lot to spin Facebook’s user-base from its very large and consequently strong equilibrium. Another great example is Waze, which also somehow competes with the Goliath that is Google Maps. Waze is a pure data network effect business, where users provide each other with real-time traffic, navigation and location information that can even serve to predict traffic patterns in the future. It’s product, GPS navigation, is nearly identical to almost every product like it on the market. But the additional benefits it has from its network effects allow it to compete.
The article points out that while the network effects trend is very strong now, it will only continue to grow stronger in new and emerging markets like Blockchain (look at Bitcoin), and autonomous vehicles (where the more miles a system drives the better the system becomes). The point that the article tries to make is that new startups need to employ network effects into their business models in some way, shape, or form if they want to survive in the increasingly competitive tech industry. It is the one of the best ways to protect a company from competition. This was my biggest takeaway from the article. Anybody can imitate your brilliant startup idea, but no one can imitate your user base.