Technology Schematic of the Enterprise

1
Monetizable vs. Non Monetizable Network Effects
2
What is a Network Effect and why is it important?
In its simplest form, a Network Effect refers to
an environment where an increase in adoption or
usage creates more value for all participants in
a social community or network.
Definition

• Network effects create enormous economic benefits
  for companies that can create them
• Barriers to entry
• Increasing returns
• Early adoption

Importance
3
Network Effects create great economic advantages
but not all are monetizable

• So, what characteristics do companies need to
  have to monetize network effects?
• It must be a Marketplace
• The goods and services exchanged through the
  network must have defined values
• Company must be able to capture a percent of the
  transaction value, become a toll booth
• Stickiness - users must have a stake in the
  network effect that goes beyond the traditional
  value of "more users, more value"

4
eBay is a great example of a company that has
successfully monetized a network effect

• Independent buyers and sellers of products are
  connected in an auction based marketplace

Marketplace
Goods with defined value

• eBay helps its users define the value of the
  goods transacted through it and each member
  benefits from this

Toll Booth

• The company take a percentage of each transaction

Stickiness

• Seller and buyer rating system your transaction
  history is your eBay reputation and it
  determines whether you get more business

5
Craigslist, on the other hand, is an example of a
company that doesnt meet the four criteria

• receives more than 750,000 job listings a
  month, and users self-publish about 14 million
  new classifieds a month

Marketplace
Goods with defined value

• Goods, services, and job positions have a clearly
  defined monetary value

Toll Booth

• Ability to capture a toll but in a limited way
• Nominal fees for job posts in seven cities
• Fee for broker's apartment listings in NYC
• No user fees nor banner ads.

Stickiness

• Craigslists users dont have a stake in the
  site. For most, the appeal of the site is that
  its free.

6
Craigslist, on the other hand, is an example of a
company that doesnt meet the four criteria

• receives more than 750,000 job listings a
  month, and users self-publish about 14 million
  new classifieds a month

Marketplace
Goods with defined value

• Goods, services, and job positions have a clearly
  defined monetary value

Toll Booth

• Ability to capture a toll but in a limited way
• Nominal fees for job posts in seven cities
• Fee for broker's apartment listings in NYC
• No user fees nor banner ads.

PARTIAL
Stickiness

• Craigslists users dont have a stake in the
  site. For most, the appeal of the site is that
  its free.

NONE
7
Googles network effect is its page ranking
system the more users click on a page resulting
from a search, the more relevant it becomes to
other users looking for the same information

• User behavior is mined to provide advertisers
  with more effective advertising, so, Google is
  essentially a marketplace that sells potential
  customers to companies

Marketplace
Goods with defined Value

• Googles users have a defined value to
  advertisers, who pay for the traffic driven to
  their sites

Toll Booth

• Advertisers value Googles ability to pinpoint
  potential customers and pay for it willingly

Stickiness

• Google is focused on the user and bringing ads to
  them innocuously across its properties. Since
  monetization is driven by both the volume and
  efficiency of matching advertisers with content
  and users, the combined volume of the Google
  user, advertiser and content provider bases,
  creates a monetization architecture which no
  other targeted online advertiser could ever hope
  to match.

8
Facebook benefits from a network effect in the
same way ICQ did, the more users on Facebook, the
more valuable the site is to each one

• Mines all the information that is posted on each
  users profile and is trying to find a way of
  selling it to advertisers

Marketplace
Goods with defined value

• The value of Facebooks users is not yet clearly
  defined, because the company hasnt been able to
  advertise to them

Toll Booth

• The inability to reach its users through
  advertising makes the value of Facebooks traffic
  difficult to define and limits its ability to
  capture a toll.

Stickiness

• Facebooks stickiness, it seems, is a little like
  Craigslists, in that it is there as long as its
  not monetized. The moment Facebook begins to
  monetize its network effect is the one in which
  users will start to defect

9
Facebook benefits from a network effect in the
same way ICQ did, the more users on Facebook, the
more valuable the site is to each one

• Mines all the information that is posted on each
  users profile and is trying to find a way of
  selling it to advertisers

Marketplace
?
Goods with defined value

• The value of Facebooks users is not yet clearly
  defined, because the company hasnt been able to
  advertise to them

?
Toll Booth

• The inability to reach its users through
  advertising makes the value of Facebooks traffic
  difficult to define and limits its ability to
  capture a toll.

?
Stickiness

• Facebooks stickiness, it seems, is a little like
  Craigslists, in that it is there as long as its
  not monetized. The moment Facebook begins to
  monetize its network effect is the one in which
  users will start to defect

NONE
10
Summary

• Companies that succesfully monetize network
  effects are few and far between (ICQ, Wikipedia)
• It is important to be able to see through the
  hype and we feel that the framework described
  above is a good way to start
• Monetizing a network effect is not an either / or
  propositon however.
• Craigslist, for example, has a limited ability to
  monetize it is not worthless, but its certainly
  not worth billions
• MySpace and Facebook might find a way to monetize
  their information beyond creating webpages for
  products or banner ads, but this might be limited
  by what draws users to their sites in the first
  place their friends
• In short, few companies will be able to
  powerfully leverage network effects into
  multibillion dollar businesses with seemingly
  impenetrable competitive advantages. But they
  dont have to in order to be profitable, all they
  need to do is make sure their network effect is
  monetizable.