Network Effects, Zoom and Skype
We’ve spent some time in class talking about network effects. While we’ve added a lot of complexity to the topic by studying things like information cascades and tipping points, on its surface, network effects are something that we can all understand. When there are network effects it means that, for certain decisions, you get some benefit when you align your behavior with the behavior of others. Indeed, a network effect can describe the increasing value of a service or product as more people begin to use it. We can see this idea if we apply it to, say, the adoption of social media. Interaction with others is crucial to a platform like Facebook; its value relies on other people utilizing it as well. If there were only 10 people on Facebook, it would be a useless platform. In the age of COVID-19, the entire playbook for interaction between people has been thrown out. Now more than ever, the entire world relies on video-conferencing software like Zoom. So, to someone who does not study networks, it may seem as though Zoom can be seen as having network effects. Indeed, because of the pandemic, Zoom has gone from having 10 million daily active users in 2019 to 200 million today. Surely, there must be some kind of network effect at play here? In fact, an article on Marker talks about how Zoom does not really have any strong network effects. The author contrasts Zoom with a platform like Slack. Slack is a messaging app, but it is meant for teams and workplaces. It is equipped with features that allow you to chat one-on-one with associates and also in groups. Slack has clear network effects — if only one member of a team signs up for Slack, it has no value, because they cannot use it to communicate with any of the other members of the team. If all of the team members sign up, however, Slack becomes an incredibly valuable collaboration network to keep constant communication with an entire team of people. One person in a company can be on a Slack channel with the whole company, a channel with their department, a channel with their immediate team, and more. So clearly, Slack becomes infinitely more useful to a team as more members of a company begin to use it. This also helps to lock out Slack’s competitors from the market, because consumers will continue to use the service that is used by the majority of their team.
By contrast, Zoom is actually built on allowing “frictionless” communication between users — the service is not meant to only work for those in its network. A Zoom user can start a video call with someone by just sending them a zoom link, and the recipient does not even need to have a Zoom account. This is exactly why Zoom has risen exponentially in its popularity during the pandemic, as its ease of use is remarkable. However, this also means that the value of Zoom as a product is always the same, regardless of whether someone is video conferencing with another Zoom user or with someone who doesn’t even have an account. In this sense, Zoom has no network effects. A byproduct of the fact that Zoom has no network effects is that it is in principle easily replaced by other video-conferencing services. If Zoom servers are down one day, there are many other ways that two people can video conference — through Facetime, Google Hangouts, etc. To me, the entire Zoom situation is very reminiscent of Skype. In its heyday, Skype was easily one of the most used video-conferencing services in the world, if not the most used. It rose in popularity when options for video conferencing were much more limited than today, and its ease of use propelled it to widespread use across the world. But much like Zoom today, it did not really have any network-specific features that would lead it to have network effects. In turn, it ended up fading away (while it is still used today, it is nowhere near as popular as it once was). I would argue that there is the potential for Zoom to have a similar fate. If it continues to allow this “frictionless” communication and does not have network-specific features, it could easily end up being replaced by a competing software that has both better features than Zoom, as well as positive network effects that lead consumers to stick with that new software instead of Zoom.
https://marker.medium.com/zooms-achilles-heel-843d78ffedcc