Avoiding the Network Effect

Read a good post from Michael Arrington at Techcrunch about the state of the venture capital market. I agree with his analysis that the market doesn’t seem to be in a bubble at this point. But the following reasoning made me think:

“The Network Effect is still the most powerful force driving Internet success today. People don’t, for example, go to Digg because it has great software. The original Digg, as launched, cost Kevin Rose less than $2,000 to create. Anyone can create a Digg clone, and many have. The reason Digg is, and will continue to be, successful is because of the community it has created. People go to Digg because everyone else goes to Digg, and every new user who submits stories and/or votes occasionally adds value to the whole network. The Network Effect is also driving Facebook’s success, and YouTube’s. None of these companies have interesting software. All of them have an incredibly valuable community. All of these companies have to work hard to keep their lead, but it is nearly impossible for new entrants to catch up”.

I agree with his observation that the network effect is one of the critical success factors for Internet success today. And I also believe that an absense of the effect will be as much a driver of success for new startups in the future. I sense a feeling that people want an Internet service they start to use works as of day 1. They feel cheated if they notice the promise of a service is only delivered if a zillion people subscribe. Put differently, the challenge for new service providers would be to reach a tipping point at the day of launch.

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3 comments

  1. Geldt ook voor sommige Web 1.0 bedrijven, met name eBay. Amazon heeft in 1999 of 2000 een auction website opgezet maar was 3 jaar te laat om de technisch minder verfijnd eBay in te halen. (blz. 169 in The Perfect Store door Adam Cohen)
    Metcalfe’s Law “The value of a network is the number of users squared.”

  2. Interesting point. I guess the network effect is something you’d want to be able to use as a catalyst, but shouldn’t have to rely upon for the basic functionality of the service. Ideally, a social app would offer value even if only two (or even one?) people use it, and could easily grow from there.

    In that sense, it’s more a matter of avoiding *the necessity* of the network effect, right?

  3. @John: The point of Arrington is also made about Web 1.0 companies. And Amazon is indeed a nice example. BTW the network effect is derived from Metcalfe’s Law but it seems his law is under some criticism recently that the value from his calculations is higher than the actual value in the network.

    @Steven: That is exactly my point.

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