The world is much smaller than we think, and many of us have had the experience of meeting someone new and being astonished by the coincidence of how many friends or acquaintances we have in common. Why do such events that appear to be mere coincidences end up occurring?
Network Effect From A Business Perspective
Over the years, technological products contributed to the development of social order. The term “network effect,” according to Investopedia, “refers to the phenomenon through which an organization’s product and or services become more valuable as more people use them.”
It could be said that the first telephone was a complete waste of time because it was only when it was connected to a second telephone that two people could communicate. This is what is meant by a “network effect; it describes the benefit of participation and how something can become more appealing and usable as more people become involved. In other words, value increases as usage increases. This is also applicable to generating SEO and social media marketing.
Models Of Network Effects
According to a study by NFX, since the advent of a more widely available internet in 1994, tech companies have generated an estimated 70% of their value through network effects. Companies with network effects end up creating the majority of the value even if they make up a small percentage of all businesses. The study discovered three distinct varieties of network effects:
1. Network effects businesses: These include companies like Facebook and LinkedIn whose value increases as more users use the platform.
2. Platform businesses: These are companies like Apple and Google that build a platform on which other businesses built.
3. Data businesses: These are companies like Netflix and Amazon that use data to gain a competitive edge.
I see network effects as the best way to create defensibility in the digital world. Companies that build the strongest network effects tend to win big.
Kevin Kelley’s 1,000 True Fans Theory
Back in 2008, the “1,000 True Fans Theory” was put forth by Wired magazine’s Kevin Kelly. The theory maintains that 1,000 true followers are all that an artist really needs to have a successful if unspectacular, career. Actually, Kevin Kelly had outlined something that would be called a “passion economy,” where the emphasis would be more on expanding the audience or strengthening connections with customers. It’s about building a depth of followership.
Businesses With Strong Network Effects
As mentioned earlier, platforms like Facebook, Twitter, and LinkedIn have all successfully harnessed network effects. In the contemporary, digitally connected world, social networks, multiplayer games, and sensor networks are three examples of business models with strong network effects.
For social networks, specifically, individual posts are the glue resulting in a network of followers who are both content producers and consumers—feeding into things like virality. Subscribers connect to and communicate with their own networks, which are based on the unique identity of the user via Personal Networks. Each additional node in the network serves as a new prospective audience as well as a new content producer for all the other nodes.
A user’s social graph and physical connections in a personal network are typically closely correlated. In fact, the personal network effect arises from the interpersonal, tribal impulse to connect with others. Companies will look to advertise products and services to match the influx of users and capitalize on trends.
Network Effects In Decentralized Network Structures
Since blockchain applications like cryptocurrencies are a natural element of the new global network, they fundamentally alter its nature of it. They are programmable and not limited by space or time. More importantly, now that the world is more connected than it ever has been before, things like software currency more easily amplify the “belief” network effect that gave prior kinds of currency influence.
Network effects make a product or a currency more useful as more people join the network. Since the majority of people are still dubious of cryptocurrencies, in order to comprehend something like Bitcoin’s current and potential worth, we may start with the only four innate digital age defensibilities, i.e., network effects, brand, size, and embedding. The biggest of them is, of course, network effects which in this context are built on a network of belief and are the primary network effects of Bitcoin.
The Challenge Of Bots
Social media bots are automated programs that work autonomously, helping to increase the number of followers in a network falsely. Bots make up a large percentage of all social media accounts. Twitter executives have testified that at least 5% of Twitter accounts are operated by bots, while experts estimate the percentage to be even higher. They can replicate human accounts seamlessly.
Even though artificial intelligence has revolutionized society and has contributed to a lot of positives, the fact that AI-powered bots can pass as humans on social media results in a number of challenges to both individuals and societies at large—especially when we bring in the power of network effects on business.
Research has found that a number of misinformation leaks are bot-influenced, particularly during the 2016 U.S. Presidential Elections. A Microsoft survey found that at least 57% globally encounter fake news online.
Network effects and their business impact will continue for decades to come. It’s important for businesses to be educated on this topic in order to best utilize network effects and predict future hurdles like bots and decentralization.
Forbes Business Council is the foremost growth and networking organization for business owners and leaders. Do I qualify?