Network effects- what on earth are they?

Earlier in the year, we were asked to look at network effects. Network effects, which are also known as Metcalfe’s Law, happen when higher sales of a product, or a service, increase its value and therefore make further sales. One of the simplest examples is the telephone network. There would be no point in owning the only telephone in the world, because you would have no one to talk to and the equipment would be useless. If a few hundred people had telephones connected to the same network, then they would start to become useful. Another example would be the internet, where thousands of people connect to the same network, creating a valuable business market. Direct network effects occur if the user’s act of adopting a good encourages other people to adopt that good, and so on, branching out. Indirect network effects arise if adoption is complementary because of its effect on a particular market. For example, users of hardware or software may gain when other users join them, not because of any direct benefit, but because it encourages the provision of more and better software, such as torrent sites like the popular Pirate Bay or a torrent such as Limewire.

One of the best examples of network effects in the media is the VHS. Once VHS video tapes gained the significantly greater market share than the old Betamax, the latter disappeared. However, DVDs have now come taken over, and VHS has sadly disappeared off the shelves. Recently though, we have seen Blu ray creep into our shops, probably coming to replace DVD’s just as DVD’s did the VHS. The rate technology is developing; it won’t be long after that until a brand new one is created.

Metcalfe’s law describes how more users increase the value of a network, which would explain the uprising of Facebook and the downfall of MySpace, as discussed in a previous blog entry. Twitter is now attempting to take the lead. When a new Twitter user talks to an existing user, it creates value to the old user, and if Twitter adds a new application, more people will join that application, making it more popular. This is network effects being put to use in our every day lives, and yet few know what network effects mean! I know before I took this class, I didn’t!

In conclusion, Network Effects are a useful tool in media society. They support media trends, and fuel business networks. Without them, business would probably crumple, as they are the hidden framework to our economy.