Wednesday, July 13, 2011

Platform X Network Effect = Real business?

Hey everyone, been a while since I posted (over a year). Think we're going to undergo a little pivot here as I've been getting more and more immersed in current tech trends, I thought I could use this soapbox as a place to express some opinions and thoughts about what I believe is happening.

First and foremost, I want to talk about the current meme that there is a tech bubble emerging. While there is definitely some reasons to be concerned when you hear of VCs outbidding one another on new businesses with nothing but a powerpoint, a lot of the new companies that are emerging have some solid advantages that I believe will position themselves as solid businesses. That said, some of these companies are smoke and mirrors - and we should likewise be concerned.

We're deep into what is known as Web 2.0 or even 2.5 technologies. Companies such as Facebook and Twitter rely on their customers to create content and attract viewers of that content. Facebook and Twitter then monetize the attention that they draw in. These companies benefit greatly from what is known as the Network Effect. The Network Effect applies to anything that becomes more valuable as more people use them. For example, if only one person had a telephone, it would be worthless as it couldn't call anyone. The more people with telephones, the more valuable each individual phone is. Sites with User Generated Content (UGC) are a perfect example of Network Effects, as the more people on these sites, the more valuable they become. Since the Network Effect is stronger with more nodes on the network, companies that benefit from strong Network Effects have a huge competitive advantage over future competitors.

The other thing that a lot of these sites do is act as platforms rather than conventional programs. A platform creates a set of rules, conventions and tools and then allows the UGC to flourish within that platform. Platforms work very well with the Network Effect (although they can each exist independently) because they create a situation where creative usage of the platform spreads across the network. Companies that act as platforms are able to harness the creativity of their users, rather than be threatened by it.

These concepts can seem very basic, but I strongly believe that companies that embrace these two elements are the Microsofts and Googles of the future. The fact that many of these technologies are emergent in the current supposed bubble allays a lot of my concerns.

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