Are Network Effects Still Relevant?
Source: https://hbr.org/2018/06/why-network-effects-matter-less-than-they-used-to
From the material we’ve covered in class, network effects seem like the be-all-end-all of a product: if users are below the tipping point, the product is destined to fail, but if they are above the tipping point, success is imminent and inevitable. However, in her article “Why Network Effects Matter Less Than They Used To,” Catherine Tucker argues that network effects are not nearly as important as they were 20 years ago. Back in 2000, Microsoft Office products like Word and Excel were wildly popular; however, in recent years, those products have steadily declined in favor of collaborative products like Google Docs and Sheets. So what happened?
Nowadays, technology is a lot more complicated. Microsoft Word doesn’t work on phones, but Google Docs does – and with modern users owning several different types of devices, their attraction to software that is accessible through a wide variety of hardware overpowers the network effects of older platforms that are limited to a single type of device. Yet this doesn’t mean that software has more powerful network effects now than in the past; in fact, one could argue that software has weaker network effects. As Tucker states in her article, a user can easily switch between Uber and Lyft on their phone and pick the app with the lower price, thus overhauling the concept that users primarily stick with a platform based on how many other people use it. With users fluctuating between apps based on metrics other than pure network effects, do network effects still matter?
In my opinion, they do, although perhaps in a more complex way than in the past. Ultimately, there’s a reason people are switching between Uber and Lyft, and not another ridesharing app. Similarly to the concept of network effects, it takes a certain amount of popularity for an app to be on most users’ home screens, which creates a “tipping point;” however, once an app gets to that point, users make decisions based on the app’s features themselves, rather than sticking with the app that has the greatest number of users. Thus, network effects are important enough to get an app on someone’s phone, but when users are comparing two similar apps, network effects don’t seem to matter very much anymore.