Wednesday, June 27, 2018
Catherine Tucker (MIT) has a short piece in the Harvard Business Review on Why Network Effects Matter Less Than They Used To. Given this week's Supreme Court American Express case, it is worth a read. Some highlights:
For one thing, today’s network effects are not tied to a particular piece of hardware, like a desktop computer. Since 2000 and the desktop era, we have seen the evolution of multiple different devices, such as smartphones, tablets, and digital assistants such as Alexa. This means that network effects are no longer intertwined with a particular piece of hardware, as was the case with the desktop computer in the 1990s. Instead, any notions of scale for technology companies depend on user profiles that can be ported to multiple different hardware platforms.
This means that platforms which exhibit network effects may be purely digital. Social networks, ride-hailing apps, or digital marketplaces do not depend on any one type of hardware, and as a consequence it costs very little for users to try new ones out. Having five different social media apps on my phone is not a problem at all. Having five different desktops with different operating systems, on the other hand, is clunky.
Scale will not bring future competitive advantage through network effects if your customers can all leave tomorrow.
Some people argue that digital platforms can be made sticky through customers owning data through a platform. The theory is that data stored in one place can lead to lock-in which in turn will power up network effects.
However, history belies this.