Overrated Network Effect
www.nytimes.com/2021/09/04/business/dealbook/network-effects
In the past decade, many platform companies came to represent a large share of the entire stock market. It is believed that the secret of success for those companies lies in the connections they enable, whether by encouraging innovation, facilitating transactions, or deepening relationships. As the article introduces, many people think that the unstoppable network effects and futuristic artificial intelligence which facilitate the growth of those companies.
However, the article then argues that the network effect is often overrated. One of the main reasons is that there are numerous ways in which the new digital platforms actually make businesses more vulnerable to competitive attacks. For example, online retail malls face much more fierce competition compared to that faced by offline retailers. Offline retailers seem to be more resilient during the Covid time while many online retailers were trying to open mall outlets. The article concludes that the traditional retailers benefit from the fact that their shoppers’ next best option is miles away while there is little cost to shift from one online retailer to another.
The article also presents the example of Netflix. It went over the history of Netflix and conclude that the success of Netflix roots in the scale and the consumer capacity. The network effect is not as powerful as many thought because Netflix’s share of the market quickly went down after more and more competitors enter the market.
In the class, the network effect is proved to be effective in increasing the influence of a product once a certain amount of the population uses it. However, in the real world, the condition for generating network effect becomes more strict. Indeed, all those popular social platforms benefit from the network effect, but they are also competing fiercely with each other while the shiting cost is low. The success of a product still needs to rely on some traditional features like scale and cost control.