Explaining the Success of Platforms with Network Effects
It is well known that software has changed entrepreneurship. With Silicon Valley and other tech centers producing innovative and highly valued startups at incredible speeds, one has to ask what separates these standout startups that make the news from all the rest. This article postulates that most of the best tech startups are “platforms.” Platforms are businesses that exist to connect to mutually dependent groups for the benefit of either one. These could either be social interactions, like those on Facebook or Twitter, or commercial interactions, like on eBay. Platforms are a type of business that are especially dependent on network effects, a concept we discussed in class that demonstrates that certain products get more and more valuable to their users the more people use them. The fact that 58% of “unicorn” startups valued at $1 billion dollars or more, and every single one of the top 10 most popular websites are platforms raises the question: what do these businesses do, and other platforms must do, to harness network effects to their advantage?
The most successful platforms understand that while the idea of network effects is essential to their survival, the idea is incomplete in their business world. In order for network effects to successfully take place, the network interaction needs to be local, meaning that in order for the product to increase in value for the user, the people other people using the product must be the kind of people that user needs to be in touch with, either through geographic closeness or common interest. Not all user bases promote network effects. For instance, if the only people joining a dating website where people living in another country miles away from you, new users might not make you want to join the site as much as if the news users were in their city or town. Therefore, it is essential for successful platforms to get a user base they know other people who could potentially use their product would need. Reddit initially created or seeded all the content it on their website so they could attract users and the sort of users they wanted; then once they had done that they let users post their own content. Airbnb leached off of Craigslist user base, Uber paid drivers to wait around in popular areas so users would always have a driver. One popular dating app gave presentations at sororites to advertise. Network effects are complicated, but still very powerful in the digital age. Platforms are naturally the most susceptible to network effects, and the ones who harness the effects the most successfully become incredibly successful. Unicorn platforms average $4.5 billion, non-platforms average $2.49 billion. As the way we do business changes, network effects remain powerful, and the most successful businesses understand that importance of creating a user base that will allow for these network effects.
https://www.bloomberg.com/view/articles/2016-08-09/the-greatest-tech-businesses-aren-t-really-tech