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Ultimate Network Effect

Old and lousy, but everyone uses it...

Economics lecture on demand brought about a short discussion on network effects. It is about how the consumption or use of particular goods/services has a positive value on the good/service to other users. Goods with strong network effect has to rely on mass adoption by the market to take hold and they tend to persist especially strongly until displaced or rendered obsolete by technological advances. The classic example would be the telephone, where you would only want if people around you had them. As a result, there is a strong path dependency in that competing products succeed or fail almost solely because of their initial ability to amass a large user base.

It has been argued that Windows Operating System enjoyed network effects because software developers started developing softwares for the Windows platform only when many people use it and people use it because most softwares released in the market only runs on Windows. How this started was entirely because of the pricing of Windows in its early days, partly due to piracy and also a bit of luck. Taken to the extreme, the network effects can suggests that people might be using a product or service only because many many other people are using it and not because it is really good. For some time, Windows was considered to be enjoying network effects to this extent: everyone thought it suck but continue using it because the softwares they needed to run only ran on Windows. It takes the rise of the internet and emergence of many mobile devices to reduce the dominance of Windows.

Social Networking sites such as Facebook or MySpace or Friendster also depend on network effect. Obviously, the ease of switching between these platforms (they're free, anyone can sign up for an account) meant that there's still a degree of competition in terms of the quality of the service but essentially there will come a day where it gets really difficult to lure people away from Facebook because they have got so much of their lives in there and all their friends are on it.

Yet the most powerful network effect have been overlooked by most of us. It was that of fiat money, paper currency issued by government backed by nothing. The reason you accept them is because everyone else accept them and we all need a medium of exchange.