A collection of content I’ve written about Network Effects, Growth and Defensibility. Last Updated 2017.
How software monopolies are built and broken
A talk I did for Product School.
In very simple terms a product with a network effect is one that becomes better for everyone as more people use it. The canonical example is a telephone and associated network. If you’re the only one with a phone, it has no value, but if nearly everyone has it, the next person to get one gets a lot of value from it.
Products with network effects grow usage when the network value exceeds switching costs. There’s always some cost to joining a network. For phones, it is your monthly bill, for Facebook it is time and attention you give the product, etc. At some point the value starts to exceed the switching costs and growth explodes. This point is what’s called a “tipping point” in popular media.
This is a common reason why products with network effects are subsidized heavily early on, to get them quickly to the point where the value exceeds the switching costs.
Not necessarily, but it lends itself well to local oligopolies with a small number of players each. Let’s look at the factors influencing the market.
- There are city level network effects similar to Lyft and Uber. I would imagine the network effect is even more localized than ride hailing because you are more likely to use taxis as you travel than scooters in new cities.
- There’s a nontrivial amount of capital you need to flood a city with enough scooters to create a network effect (Bird and Lime have raised $200m between them), so not everyone can do it once there’s a well capitalized player in a market.
- Congestion is a negative network effect that creates a bottleneck. Each company needs a high minimum number of scooters to make the service viable, so there’s only physical room for so many companies. In ridesharing, one car can be used across multiple networks. This is not true for scooters. Cities are not happy about having these scooters be left around the street (As complaints roll in, San Francisco considers action over wave of motorized scooters).
- On the user side, multihoming and installing a few different apps is possible, but there’s only so many apps a user has the time and attention to compare pricing for. Well capitalized newcomers can start price wars, but the competition will just raise more capital to compete. There’s no good reason for an aggregator without government intervention because that favors consumers at a cost to each of the networks.