The Impact of Network Effects is Changing
Network effects once were touted as one of the best models for businesses to consider as they were releasing new products and services. Taught as one of the key ideas in business and management classes, the idea seemed to pave a logical way to success: release a product at a lower price or even make it free until you can cross the tipping point; then you can ride the benefits of network effects to success. However, in this article, author Catherine Tucker argues that network effects don’t have the same influence as they used to.
Take for example Microsoft; once the powerhouse technological ecosystem, it is now losing a large share of its users to other companies offering the same services such as Google (e.g., Microsoft Word vs Google Docs). But how was it that other companies were able to break into the market so easily despite the vast share already claimed by Microsoft?
The answer is that many platforms/services/products are no longer tied to large and expensive equipment, but rather can now be completely digital. In this case, consider if Google and Microsoft were each tied to their own desktop computers. Then trying a new product created by Google would require investing in a whole other computer, something that a lot of people would be hesitant or even unable to do due to financial reasons. It is not hard to reason then that it would have been much harder to dethrone Microsoft if this were the case.
Now consider social media apps which have become a large part of people’s lives these days. It’s easy enough to have 5 different apps your phone; you can conveniently be a customer of any one of or all these companies. But what if you needed to buy 5 different desktops to use all 5 different apps? People would probably only be able to be a customer to one company. Similarly, one of the most recent profitable business ventures has been ride hailing apps such as Uber and Lyft. But many of us have both installed on our phones; when we need to look for a ride, we sift through both apps and pick the one with the lowest prices at that time. In fact, drivers do the same, only taking rides on the platform that offers them a higher profit. Tucker reflects that network effects have much less effects on products and services if they aren’t “sticky.” She states that “scale will not bring future competitive advantage through network effects if your customers can all leave tomorrow.”
This is a huge insight to how network effects will influence the world in today’s digital age. Their effects have become less prominent because of the ease in which consumers can pick and choose among different options. This relates in a way to the concept of the long tail as discussed in class and the textbook. While we can expect the rich-get-richer phenomenon to still play a major role and be accentuated by widely available information (like the scenario given in the problem set with accessible reviews), we also currently live at a time where it is easy to just try out all the options and decide for ourselves which one suits us better. Before, downloading songs cost money (e.g., iTunes was “sticky” because it gave its customers a sort of ownership of songs), but with platforms such as Spotify where it has seemingly unlimited songs available to consumers, it’s much easier to just pick and choose songs we personally like after trying them out first. With the digital age, network effects have been accentuated in some aspects, but also weakened in others, and it is interesting to see where the future will take us as more and more services go digital.
https://hbr.org/2018/06/why-network-effects-matter-less-than-they-used-to