Network Effects - The Information Space- Notes

First Author: [[Angadh]] These are not my thoughts but that of [[Anu Hariharan]] on the podcast "Starting Greatness". Listen [here](https://greatness.floodgate.com/episodes/anu-hariharan-how-to-think-about-network-effects-for-your-startup-from-the-beginning/transcript) # Definition of a Network Effect The simplest way to define a network effect is as more users join a network, the service becomes valuable to all the users, including the existing users. So it's literally as more users joined the platform it's useful to everyone. # Why design for Network Effects It has the ability to tip the markets to a winner-take-all. Okay. And if you are able to get to winner-take-all, it translates also into software margins and pricing power in the market. Therefore, if you, as a founder, pay attention to whether your product has the potential to have network effects, it can really give you a market-leading position relative to all the competitors. # Questions to answer to evaluate if your idea or company is one with with NE Very early in the conversation, [[Anu Hariharan|Anu]] says - Does your product have a utility? - And does it have the opportunity to connect different groups of users to form a network? (e.g. Facebook asked "Do I need to be a cluster in each university?" or "should there be a cross-collaboration? The reason they asked that question was not because they thought about network effect, simply because there were other competitors in other universities. And so, they asked themselves) - (If) my product has a utility, but how do I get it to scale? - How do I get students from other universities who have a competitor product to use us? ## Mike maples Jr asks again later : - Is it heterogeneous or homogeneous? - What kinds of connections? - what kind of clustering? What's the direction of the connections? Is it unidirectional or bidirectional? And then you've got complimentary networks like Microsoft Office, Microsoft Windows, and things like that. ## To this Anu says: - I think that there are like four to six basic questions any founder should ask when they're building something, even from day one: - Utility One is, what is the product's utility? __Case study__: In the case of Facebook, the utility was it's a class directory. And if you ask some of the Facebook users from 2004, which were predominantly university students, they would say, especially in freshman year, it was a great way to get to know the rest of the class, because it could be quite intimidating to know who are the other folks in your class. And Facebook just made it really easy. So in the case of Facebook, it was clear the utility itself was the social connection. In the case of Airbnb, it was guests connecting to hosts, which is a traditional two-sided marketplace. In the case of Skype, it was placing phone call to each other, so they were just homogeneous users. In the case of Open Table, it was restaurants connecting to diners. More recent examples, Zapier. Wade and his team knew from day one they had potential to build a network. The idea literally was workflow automation to help integrate apps. And so, they knew very well very early on that if they became the destination to connect apps to various app developers to help them integrate workflows, that they had the potential to become a platform. - Network : And does it have the opportunity to connect different groups of users to form a network? So in the case of Facebook, it was clear the utility itself was the social connection. In the case of Airbnb, it was guests connecting to hosts, which is a traditional two-sided marketplace. In the case of Skype, it was placing phone call to each other, so they were just homogeneous users. In the case of Open Table, it was restaurants connecting to diners. - __Virality (or growth tactic)__: Once you know you have a network, what is the growth tactic? what viral loop mechanisms can I put in place via the product to scale the number of users? Because you can't just build it and expect the users to come. You need to have a growth tactic. __Case study__: in the case of Zapier, it was literally what is the growth tactic? Well, what viral loop mechanisms can I put in place via the product to scale the number of users as well as apps that integrate with Zapier? What they did was amazingly brilliant. They had a landing page for pretty much everything. So if you were searching online for an app to integrate with, there would be a page about that. There would be a separate SEO page about what the integration is. And then there would be a separate page about the use case of that integration. - __Critical mass__: And once you have a growth tactic, you need to figure get to critical mass, because there's no point having potential for network effect and not getting the critical mass. __Case study__: if you search on Google for any sort of workflow integration, Zapier was one way to find out. And when you land on Zapier, you may have looked for, for example, a Gmail integration, but then you see all these other apps and you figure out that I can do integrations with all these other apps as well, which may help improve my workflow. That was their hack to get users to sign up without paid acquisition. That's where the critical mass comes into play. - __Retention__: How are you re __Case study__: in Facebook's case, the number one thing that Zuck paid attention to was retention. So they tracked what percentage of the users in a university logged in daily. But I think Facebook was one of the early platforms to pioneer something called a [smile curve](https://en.wikipedia.org/wiki/Smiling_curve). Have you heard of the smile curve? I think the focus on the smile curve was not just to boost the numbers, but it helped them think through what product features do I need to build so that I can increase the utility of the platform to a daily use case. That is a very important distinction, and I think the Facebook founders really paid attention to that. They may not have thought of network effects, but the focus was on retention. And so, every university that they went to, the playbook was what percentage of the university users have we captured? And what does the retention look like? Facebook is one of those unusual platforms whereas they saw user growth, retention improved. That's rare, and that doesn't happen by accident. And I think the founders, they really paid attention to how to improve retention. # Further reading - [Sarnoff's Law](https://en.wikipedia.org/wiki/David_Sarnoff) states that the value of a broadcast network is proportional to the number of viewers - [Metcalfe's Law](https://en.wikipedia.org/wiki/Metcalfe%27s_law) states that the value of a [telecommunications network](https://en.wikipedia.org/wiki/Telecommunications_network "Telecommunications network") is [proportional to the square](https://en.wikipedia.org/wiki/Quadratic_growth) of the number of connected users of the system ($n^2$). - [Reed's Law](https://en.wikipedia.org/wiki/Reed%27s_law) is the assertion that [utility](https://en.wikipedia.org/wiki/Utility "David P. Reed") of large [networks](https://en.wiktionary.org/wiki/Network "wiktionary:Network"), particularly [social networks](https://en.wikipedia.org/wiki/Social_network "Social network"), can [scale exponentially](https://en.wikipedia.org/wiki/Exponential_growth) with the size of the network