The Network Effect: Part 2

October 1st, 2006 | Categories: markets, social media, strategy, trends

Let’s look at another great example of the ‘network effect’ (click here for part 1). AsIM logos previously mentioned, with every user you add to your userbase, your network becomes more valuable and relevant to all. So let’s take a look at instant messenger clients (i.e. MSN Messenger, AIM, Yahoo Chat, Google Talk). To facilitate this process, let’s create fictitious characters and a conversation dialogue.

Tim: “What IM client do you use, John?” 

John: “I use MSN Messenger. I have about 100 contacts.”

Tim: “Have you seen the new Google Talk. It’s great. Full of new features and functionality.”

John: “That’s great, but I’ll stick with MSN.”

Tim: “Why is that?”

John: “Well all my contacts currently use MSN. If I were to switch, they would all have to switch as well to make it worth my while. This would be next to impossible, as all their contacts would have to switch as well - and the cycle continues onward. All I’m really interested in is a tool that will allow me to chat with them. Added features and functionality are great, but they’re not my main focus, nor will they tempt me to switch.”

Tim: “Fair enough. Makes sense I guess.”

This example showcases the power of the network. With every added user, the network becomes more valuable. In addition to IM clients, social networks are also a great example of this phenomenon. If all your friends and/or family are using Friendster, for example, why would you want to use hi5? It wouldn’t make sense and wouldn’t provide any value to you. There are huge barriers to entry for the product to become valuable to you.

Once again, do not underestimate the power of this effect. Next time we’ll look at how the network effect may lead to a monopoly. And what better example than this ‘little’ operating system company you may have heard of… 

One Comment

  1. Mapping The Web » The Network Effect: Part 3 Says:

    […] Click here for part 1 or part 2 of the Network Effect series. […]

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