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Life before (without?) the Network Effect
Charlie O’Donnell linked to a neat essay with a key paragraph:
From now on I’m going to call this idea the “Del.icio.us Lesson”. This is the lesson that personal value precedes network value: that selfish use comes before shared use. We’re seeing it more and more everyday in services like Del.icio.us, Flickr, and is an interesting aspect of networked applications. Even though we’re definitely benefitting from the value of networked software, we’re still not doing so unless the software is valuable to us on a personal level first. And I wonder, how will Google Base fare in light of this? What personal value are people getting out of it? Is it enough to make the service successful?
Totally on the mark. The problem with relying on network effects is that if the first few users don’t get value, there’s no way you’re going to get 10,000 to form substantive network effects.
But I would take it another step - businesses in general should plan on becoming profitable, or at least have some top-line in a “pre-network-effects” world. Delicious is problematic for me because it never never sold anything except itself.
As such, the thought that most of these businesses could get success through just advertising feels weak too, because it extracts so very few dollars (pennies?) per user, and depends on large size to support the model. But this latter is a topic for another time.
February 11th, 2006 at 1:58 pm
Another big issue with these advertising-driven business models is that there are currently a very limited number of “suppliers” and these suppliers have significant power over the relationship.
For example, Google, with AdSense is by far the market leader for providing the advertising revenue stream for many of these sites. Google has not been known to be particularly transparent with regards to revenue generated, what percentage they keep, etc. Also, there’s nothing stopping them from changing deal-terms (including “pricing”) at their will.
This is a classical example of where a critical supplier wields too much power, and this creates an inheret challenge for the web site/service owner/opeartors.
April 25th, 2006 at 12:29 am
[…] Ray Deck The problem with relying on network effects is that if the first few users don’t get value, there’s no way you’re going to get 10,000 to form substantive network effects. […]