Network Economies Power
Build a product whose value to each user grows as more users join, creating winner-take-all
Network Economies exist when the value of a product or service to each customer increases as more customers use it. This creates a self-reinforcing cycle: more users means more value, which attracts even more users. The Benefit is the ability to charge higher prices due to the greater value conferred by a larger user base. The Barrier is the astronomical cost of gaining share -- a follower would need to compensate potential users for the value deficit of joining a smaller network, often requiring payments so large as to be unthinkable.
Helmer illustrates this with the LinkedIn vs. BranchOut case. Despite BranchOut's rapid early growth to 14 million users by leveraging Facebook, the company collapsed when Facebook restricted its viral growth channels. LinkedIn's 70M-member professional network held insurmountable Network Economies in the professional space. Even Google, with its vast resources, could not unseat Facebook's personal network with Google+.
Network Economies frequently produce tipping-point dynamics where once a leader achieves sufficient scale advantage, followers simply capitulate. However, these effects are bounded by the character of the network -- Facebook and LinkedIn coexist because personal and professional networks are separate domains. The decisive factor is often getting the product most right earliest, as Facebook demonstrated over MySpace.
- The value realized by a customer increases as the installed base increases
- Network Economies often produce winner-take-all outcomes once a tipping point is reached
- Network effects are bounded by the character of the network -- personal, professional, geographic, or functional boundaries define the extent of Power
- Early product superiority is often decisive because it determines who scales fastest through the tipping point
- The Barrier is the unattractive cost/benefit of gaining share: the price discount needed to offset the value deficit can be astronomical
- Both direct network effects (users valuing other users) and indirect network effects (complements attracted by user base) can drive Power
- Validate that genuine network effects exist in your product categoryDetermine whether additional users create meaningful incremental value for existing users. The network effect intensity (delta) must be large enough relative to the potential installed base and cost structure for even one player to be profitable. Many Silicon Valley startups assume network effects that prove immaterial.
- Define and defend the boundaries of your networkNetwork effects are bounded. LinkedIn and Facebook coexist because professional and personal domains are separate. BranchOut failed by trying to bridge these boundaries. Identify the natural boundaries of your network and ensure your product fully serves the needs within those boundaries.
- Scale faster than any competitor to reach the tipping pointIn network economies businesses, the strategic imperative is to scale faster than anyone else. If another firm reaches the tipping point first, the game is over. Get the product right early, then pursue aggressive growth during the takeoff stage. Facebook trumped MySpace by getting the product more right, more quickly.
- Cultivate complements to strengthen indirect network effectsSmartphone OS power comes partly from apps -- another OS would start with a dearth of apps, making it unattractive, which in turn discourages developers. Actively cultivate the ecosystem of complementary products and services that make your network more valuable and switching more painful.
BranchOut launched in 2010 as a professional networking Facebook app. Despite $49M in funding and impressive early growth to 14 million monthly active users, the company could not overcome LinkedIn's 70M-member installed base in the professional domain. Recruiters went where professionals listed themselves, and professionals went where recruiters searched. BranchOut's growth proved superficial -- few users were genuinely engaged -- and when Facebook restricted its viral wall post mechanism, the company collapsed.
Helmer examines BranchOut's failed 2010 challenge to LinkedIn as his primary case. Rick Marini, a Harvard MBA-trained serial entrepreneur, raised $49M betting he could build a professional network on Facebook's larger base. Despite rocketing to 14 million monthly active users, BranchOut's users were never truly engaged, and when Facebook banned its viral growth mechanism, the company deflated. Hearst acquired the assets in 2014. Meanwhile, LinkedIn's Network Economies proved insurmountable in the professional domain.