The network effect
“We only invest in startups with a network effect”
So said a kind VC to me a while back when I was looking for funding for Phonefromhere. They focus their efforts on businesses where the increase of the userbase benefits not just the business, but also the users. Each new purchase or sign-up making the service or product more valuable to the existing users – the fax machine is the classic example but perhaps the phone was the original. This contrasts with classic comodities like diamonds, where scarcity drives up prices.
I spent the last week with a group of telco execs and in- house researchers, who get together annually under the auspices of ICIN, to discuss how to get the benefits of future networks, surrounded by beautiful mementos of the past.
I was there to give a tutorial (with Dean Bubley) on webrtc. We heard papers describing several visions of services that future networks may offer. These ranged from automobile money, where a car’s embedded communications gear doubles as a payment device, to a chromecast like virtual set-top box where the ui and ux resides ( browser like) in the cloud, not on the local box. There was a fascinating set of statistics on the consumption of video over the internet and the huge peak in demand this causes.
Mulling over these projects, it seems to me that they exhibit an I-own-the-network effect, where the world is expected to fit around the network that the telcos own. Being on the inside of a huge industry seems to give you a feeling that the universe should flex to suit you. Unfortunately for them the telcos are no longer the most massive bodies in space so things don’t work that way any more.
As a concrete example, one of the papers described the use of RCS/Joyn as a central hub for notifications from social networks. Lets ignore for the moment the fact that all smartphone OS’s have perfectly decent notification APIs. Such usage is almost certainly outside the Terms of service of the Facebook (or twitter) APIs. No thought seems to have gone into the question of why Facebook would allow such usage of it’s users data.
The only way you’ll get Facebook permitting that sort of thing is if users demand it and it drives more advertising traffic. Which brings us back to the original network effect. None of the proposed services seemed to me to bring direct benefits to new users, let alone exhibit any knockon benefits to the existing user base, so why would they clamour at facebook’s door to allow the service?
The conference was held a converted convent in Venice, which offers a wonderful set of possible telco analogies
- Decaying splendour of a once great communication hub
- An impossible city built in an absurd way just above the tidal flood
- A city capitalizing on the assets it built up in it’s trading past to make itself a tourist destination now.
The parallel that stuck with me however was that the building of a bridge to the mainland caused a mass population exodus from the city, homes were converted into bars,hotels and shops, with the workforce commuting in and out by road. A wholesale re-invention caused by users adopting a new communication channel – now there is an interesting idea.