A network effect is “the effect that one user of a good or service has on the value of that product to other people”. When there is a positive network effect we say that the good or service in question increases in usefulness the more users there are, like the telephone or online social networks.
Of course, being in a business or sector that relies on positive network externalities brings with it one inherent problem: getting to the sociodynamic critical mass. Chris Dixon looks at six strategies for overcoming strong network effects; the so-called “chicken and egg” problems.
- Signal long-term commitment to platform success and competitive pricing: Microsoft’s $500m promotion of the xbox platform.
- Use backwards and sideways compatibility to benefit from existing complements: Microsoft with DOS and Windows versions, Apple with Bootcamp.
- Exploit irregular network topologies: (Early) Facebook and JDate for social networking and dating respectively.
- Influence the firms that produce vital complements: Sony and Philips influencing Polygram for their CDs.
- Provide standalone value for the base product: Recording of television on VCRs.
- Integrate vertically into critical complements when supply is not certain: Nintendo’s games consoles with games funded by Microsoft and Sony.
via Ben Casnocha