Network Effects Online


Metcalfe’s law where the value of a network is proportional to the square of the number of other networks is a key theory that demonstrates the network effect. Online this model is still applicable as it was for AT&T and the fax machine, however the network effect online brings in another dimension – social and personal characteristics.

Can a network effect go bad? With users driving this network building can a product / service be de-valued or poorly repositioned as a result of the online networks it is circulated in?

Ebay is another example of the positive effects of network building however it’s success can not be attributed to this alone. I doubt ebay would have been as successful if they hadn’t included feedback loops – this rating provides transparency and trust to users improving retention. (Weber, 2008)

This begs the question whether internet activity is more than just a network effect. When we look at Google there model wasn’t network effect it was a superb and relevant service – they built a ‘mousetrap’ (Weber, 2010) not a network (excluding later developments like Gmail etc). The world-wide-web is in itself a network – a network of communities be they a business website or a social network (Social Network Blog y10, 2006), built on feedback loops and sharing, this is the network effect on steroids.

For a new entrant wanting to spread the word online, needs more than just to lean back on the network effect model stimulated by content. The company needs to consider the social implications of where there message is spread, how sticky their primary site is, how much better is their product than the competition and the strength of their brand. Networks won’t be formed unless these elements have been developed before spreading a viral online mainly because of the volume of content that populates the web today.

Weber, J. (2008), The Mythical Power of Network Effects, (Online), Available: http://technology.timesonline.co.uk/tol/news/tech_and_web/article3809879.ece [Accessed: 20.11.10]

Social Network Blog y10 (2006), Effects of Online Communication (Online), Available: http://www.mysocialnetwork.net/blog/481/y10/2006/11/effects_of_online_communicatio.html [Accessed: 20.11.10]

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