The Network Effect doesn’t make you invincible

Unlike Socialism, which fails in similar ways wherever it is tried, Capitalism gives us new things to worry about every generation. In a dynamic economy, companies from different industries threaten to become monopolies every generation, giving us new reasons for why this time’s threat is different from that of last time.

The threat our generation faces is apparently from monopolies that benefit from network effects. We are particularly scared of social media companies that exercise control over freedom of speech, who cannot be dislodged from their monopoly perch because they have the power of the Network Effect.

The Network Effect

You are trapped in the Network Effect when being part of the network may not be your first choice, but you have to be there because all your contacts are there. Your contacts are there for the same reason. It is a collective action problem. There may be a network that all of you would move to if only someone could coordinate, but that is an impossible task.

So everyone hates LinkedIn but everyone is still on it because all their professional contacts are there. They are on Tinder because all potential romantic partners are there, on Facebook and Instagram because all their friends are there and on Twitter because all their enemies are there.

The second reason why all of you are still on the network is that you all would like to move, but each one’s choice is a different one, so you stay on the current one as a compromise.

Network effects are self-limiting

It is a meme, popular among young women, to show four photographs of themselves representing how they wish to appear on different social networks – a sanskari look on Facebook, a professional look for LinkedIn, an exotic photograph of themselves for Instagram, and a sexy look for Tinder. A Twitter look usually does not appear in this set of photos, presumably because people rarely have photos of themselves having a meltdown and screaming at people.

This meme illustrates a truth about social networks and network effects. Network effects aren’t always positive. There are some networks you would go to because all your friends are there. For some, that is a reason to avoid that network. No teenager wants to be in the same social network as his parents, as Facebook is learning. As networks grow too big, there is a real possibility that they become infrastructure – just as email is, or they are so crowded that no one wants to go there.

The meme also teaches us that there is a market for more than one social network. In theory, we would like to have different social networks for different purposes, just as the young woman in the meme has, the better to ensure that her sanskari look doesn’t leak into Instagram and her love-life is not revealed on Facebook.

The vector of attack

In any industry, if a challenger wants to dislodge the dominant player, taking it head on is rarely the right way. The better way is for the challenger to attack an area where the dominant player isn’t noticing, doesn’t consider it worth its while, or is unable to respond.

The limitations of the network effect suggest such a vector of attack for challenger social networks. You won’t dislodge Facebook by building a better alternative to Facebook. You will do it by finding a group of people who want to be on a different network from the others, or a theme that a network of people can coalesce around, and begin your attack from there.

In practice, this is not easy to do. Managing multiple social networks is hard, which makes it hard for a new social network to gain a foothold. The challenger social network, in its initial phase, needs to have a well-defined theme. If you have ever tried to moderate a mailing list and tried to keep people to stick to particular topics, you would know that it is difficult to do. It is almost impossible to do at scale. People want to do fraandhip on LinkedIn and they use Facebook for professional networking. If it were easy to do, we wouldn’t have been having arguments about network effects in the first place.

But it isn’t impossible. There surely are some natural communities you can begin with – the community of youth is one obvious way, but I am sure there are others that are not so obvious. The Network Effect isn’t some unprecedented power that successful companies of this generation have, a power that makes them so strong that we have to reevaluate everything that we have learnt about the wisdom of breaking up monopolies. It is a power. It is a moat that is difficult to cross. It does not make you invincible. One day, the moats will be crossed, and this generation of companies too shall pass into oblivion.

But Facebook is buying them all up!

But isn’t Facebook is buying all the challenger social networks? It bought up Instagram and WhatsApp! If the dominant players keep buying up the challengers, who will be left to challenge the monopolists?

Well, calm down. A monopoly isn’t much of a monopoly if it takes work to maintain it. If the monopolist has to constantly scan the market for potential threats, move nimbly and introduce new features to maintain dominance or acquire any companies that can pose a threat, it isn’t enjoying a natural monopoly.

Every organization gets old. Once it gets old, it gets flabby. The founder either moves on or doesn’t have the same instincts he used to. The people working there don’t have the same drive they do when young. The organization gets too bureaucratic and procedure oriented. New ideas are stymied by turf wars. It doesn’t move as quickly to acquire or crush competitors as it used to. It is slower to introduce new features, or even to copy them from competitors. It doesn’t see emerging threats as quickly as it used to because it is too focused inwards and too focused on existing customers.

This has happened to every organization in history and it is a fair bet that it will happen to the companies that run social networks as well. I believe that we should be concerned about monopoly power only if it lets the old and flabby organization stay a monopoly long beyond its sell-by date. I don’t see evidence that this is happening. An hour is a long time on Twitter, but in historical terms, the current social media companies haven’t really been in a dominant position for long.

Social media will destroy democracy

We are all very concerned about the effect social media has on society, our political system and our democracy. We are all very concerned that companies that run social media will dominate the discourse and decide who can say what. We are all very concerned that social media companies are monopolies. My belief is – no, they aren’t monopolies. No, they don’t dominate the discourse and determine who can say what.

Yes, social media will destroy democracy, but if it is any consolation, it won’t be through the monopoly power of the companies that run social media.

Postscript: Why isn’t there a social network in India?

I’ve argued that one way to challenge the dominant social networks is to find a group of people willing to break away and form their own network, perhaps around themes that has little overlap with those of the larger network. Now, there exists a large nation named India. It has a vast population that speaks many different languages. It has many interests and cultural issues many of which overlap with the rest of the world and many which don’t. While this country is fairly well-connected with the rest of the world, it also has many people who should be willing to join a social network that caters to their interests. It also has a government with a lot of influence, and interest in supporting an indigenous social network. If the officials of this government begin extensively communicating on a challenger social network from India, it should attract a nucleus of influential people who can seed the growth of this network. It also has skilled programmers and a startup ecosystem that can build a new network. Could the next social network come from India?

Just kidding. It won’t.

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