Network effects are extremely hard to start. It is tough to create a business model that has a continuous loop in which the more that loop turns, the stronger the business model becomes.
In many startup pitches, I see startups put a graphic of a network effects loop in their slide deck, but truth be told network effects in a business model are few and far between.
Google has network effects. The more people use Google for search, the better the search engine becomes. The better it becomes, the more people want to use it.
Etsy and eBay have network effects. The more sellers congregate to sell there, the more buyers are attracted. The more they purchase attracts more sellers, which attracts more buyers.
One business that I participated in actively was the exchange business. Exchanges have network effects. It is almost impossible to take all the volume and open interest from one exchange to another once network effects are established.
When I was on the board of CME, we had consistent competition for contracts like the Eurodollars. No one could beat us. When we started Agency Futures, we competed with the CBOT head-to-head. No one “won” because the contract never became a viable futures contract.
There was a short moment in time in the late 1990s, early 2000s when exchanges could have stolen contracts from other exchanges. ICE was kicking NYMEX ass in crude oil and was in the process of taking the contract until CME bailed the NYMEX out. It was a pure technological play because ICE had tech where NYMEX didn’t. CME overpaid dearly for the NYMEX when they could have competed against both ICE and NYMEX and probably won the day.
There are network effects in social media too. We see them play out all the time.
Facebook, Twitter, LinkedIn, and other social network have powerful network effects. It’s impossible to displace them unless the business screws up.
We have seen that with Twitter.
Twitter’s management team screwed up. They didn’t pay attention to the business model and instead paid attention to a political model. They willingly allowed the government to censor their platform. The Twitter management team losing focus on the real business allowed competitors to start up and get some traction. The largest threat was Parler until Big Tech derailed Parler with the assistance of Big Government. There were others like Gab, Truth Social, Parler Version 2, and even the Babylon Bee’s attempt at a social network that looked like Twitter. Substack is competing with it’s own stream and there are other clumsy efforts like Mastodon. Turns out, programming a thread where people can type comments isn’t the challenge. Getting network effects is. When Elon Musk bought Twitter what happened?
The Financial Times reports that “But the number of people using the app has been in steady decline ever since, with daily active users on Android hovering between 11mn and 12mn over the past seven days. Twitter usage on the same platform has been largely unaffected by the launch of Threads.”
The battle isn’t over and it won’t be over when Elon and Mark Z finally engage in that cage match fistfight. Facebook has stronger network effects than Twitter because it owns Instagram and WhatsApp. Also, the platform plugs into more ways to share.
Musk is rebuilding and rebranding Twitter. All the lefties that were used to not hearing noise from the right wing hate that free speech has become de rigueur on the platform. But, one person recognizes what’s happening. Trump is going to open up his Twitter account again because he knows Truth Social has zero reach. He also knows he won’t be throttled by a left-wing politicized management team.
When Musk builds new functionality inside the Twitter walled garden, I suspect daily user numbers will build. You never “go short” someone like Musk who has done it over and over again continuously his entire life. When he bought Twitter he understood its network effects. That gave him the courage to do what he did to reshape the company to this point.
The left-wingers will cry incessantly, but they will use Twitter just like they used to. Except, now they will have to compete for attention. Competition isn’t something left-wing people embrace.
One of the real world limitations of certain network effects is simply human bandwidth coupled with the learning curve to master a new platform.
I checked out Threads, but I'm never going to actually use it. I was just curious.
JLM
www.themusingsofthebigredcar.com
Musk is easily the most interesting man in my lifetime and I am no spring chicken. Maybe Steve Jobs is a distant second. He has personally totally transformed 2 huge industries (auto and space) and has knowingly walked into a political and cultural hornet's nest with the Twitter acquisition. He is not like most of the tech giants- his companies actually make things. I think the Twitter purchase was driven by two things;
1) He knows he will lose billions over the short term but feels that X will be a platform for something bigger that he wants to do long term.
2) He knows he will lose billions short term and doesn't care because he feels that it is better for humanity to support free speech and this is the only way he can contribute to that fight.
While I don't think he believes that he will take a loss on his investment in Twitter over time, I think that if he did take a loss of billions and still accomplished his goal of pushing society back towards free speech he would shrug and take the loss gladly. This is a man who thinks long term and who thinks of humanity. Remarkable.