Silicon Valley VC Andreessen Horowitz put togethers slides that cover platform utility and the role of network effects. The presentation does a good job at providing a taxonomy on different products. It comes in handy when thinking about channel role / platform utility from a media planning perspective and also evaluating start-up ideas. They define platform in terms of development, but for advertisers we can think of it wider as we are likely to be making API calls in terms of data, targeting and ad placement. It is something that we are building demand or brand equity on.
Key takeouts from the presentation
- A network effect occurs when a product or service becomes more valuable to users as more people use it
Network effect benefits
- Create barriers to exit for existing users
- Create barriers to entry for new companies
- Protect from competitors eating away at margins
- Creates a winner takes all style market
Communications networks laws that provide indicators likely platform utility
- Sarnoff’s law – the value of a network is proportional to the number of viewers
- Metcalfe’s law – the value of a network is proportional to the square of number of connected users
- Reed’s law – value of a group forming network is proportional to the number and ease with which groups form within it (subgroups grow faster than sheer number of P2P participants
If it isn’t clear where they fall within these networks, it’s a warning flag for brands on whether to invest in the platform.
User modes
- Single ‘player’ mode – the product has immediate utility for a single user. Examples would be Flickr in the early days for photo storage, Foursquare in the early days to bookmark places you’d been to as a locative memory. Social bookmarking sites like Pinboard, or Delicious would have been in here had it not been retired
- ‘Multiplayer’ mode – the product has no utility for a single user. This is particularly true for communications products. Examples would be Viber, Skype, Slack, Zoom etc.
- Products can be both single player and multiplayer. So the community that built around Flickr for example.
- Single player is more powerful when accompanied by an initial tactic to drive early network growth. Instagram photo filters was a way to post pictures on Twitter before there was enough critical mass. They help with adoption in the early days of a product when network effects aren’t sufficiently strong yet.
- What’s the initial growth lever or tactic that will get it to scale?
Case studies
- Facebook found that connecting a new user to 10 friends within 14 days of sign-up was key to improving retention
- Focus on daily usage (habit building) to help grow network. Focus on engagement rather than just overall number growth
- Growth usage, even as user numbers grow is a sure sign of network effects at work
- Facebook took a clustered approach: Harvard, then Stanford and eventually other universities in the US and abroad. Rather than focusing on growth. The immediate ‘single player’ utility they offered was an online school directory
- WhatsApp had a different network type to Facebook. Each WhatsApp user had about 20 connections compared to approximately 980 friends on Facebook. Fewer connections also meant clustering around family, close friends of interest based WhatsApp groups with more engagement
- AirBnB had two sides of their network. More hosts attract more guests and even become guests themselves. More guests means more business and money for hosts
- Medium found that ‘single player mode’ can help get to ‘multiplayer mode’ through building sufficient critical mass.