The $41 Million Mistake Caused by Network Effects
https://www.applicoinc.com/blog/lack-network-effects-killed-color-app/
Color is a photo sharing app created by entrepreneur Bill Nguyen that was launched in 2011. It didn’t require users to create an account with a username or password, nor did it have any kind of “friends” or “following.” Instead, a user’s photo stream was populated by images that other Color users within 150 feet had uploaded (Zambrano). This created a so-called “elastic network” that changed depending on where a user was and who was around them. Rather than create a platform that was based on who you already knew, Color wanted to be a place that exposed users to the content of strangers. “The platform ‘intelligently identifies nearby smartphones, whether at a local park or at a concert, using advanced proximity algorithms’ and instantly shares photos, videos, comments and likes with them” (Zambrano). The company generated lots of buzz in the media and managed to raise $41 million. The app launched on March 24, 2011 and shot to the #2 spot in the App Store charts.
However, within 30 minutes, Nguyen realized that they had a problem. Dozens of people were posting bad reviews because their photo feeds were blank. The problem was that if no one was using the app, it was pointless. Additionally, for people who didn’t live in big, densely packed cities like San Francisco, the 150 feet rule made the app a ghost town. In order for the app to work as intended, a user needed to be near many other users, and these users needed to be uploading photos. However, with no one posting photos at the beginning, new users had no incentive to stay on the app and upload photos of their own.
Network effects greatly affected the success of Color. Since the app could not get over the “tipping point” of users in order for the app to be a wild success, it faded into obscurity. One way that this problem could have possibly been avoided is if the app was pre-populated with users and images, so that the first people to create accounts didn’t have empty photo feeds. The company also could have had an initial big advertising campaign in order to get people excited about the app and hopefully download it. Since Color was subject to network effects, its inability to garner lots of users right at the beginning led to its downfall.