Classroom Companion: Business

 
Chapter 9 · Network Effects

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9
Which social networking service should I choose?
Social network A
Social network B
Imitator
Innovator
. Fig. 9.7 Network effects in social network services. (Authors’ own figure)
. Fig. 9.8 Market evolution if all customers are imitators or innovators. (Authors’ own figure)
9.3 · Characteristics of Network Effects

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are only innovators. As indicated above, the imitators inflict strong network effects 
on the market evolution, while no such effects are present in the case of only inno-
vators.
Observe that the initial market growth is extremely slow if all customers are 
imitators. It may take several years before the market has reached a critical mass for 
which the market penetration is commercially sustainable (represented by the dot-
ted line). This is the latency associated with the market. Moreover, if there are no 
initial customers at all, the market never starts to increase—there is no one there to 
inspire other customers to buy or use the service. The long latency is the most dif-
ficult strategic dilemma in markets with strong network effects—the supplier may 
abandon the product because of the slow initial growth. On the other hand, the 
market with only innovators grows rapidly initially and has low latency. This point 
is considered in more detail in 
7
Chap. 
18
where the solution of the Bass equation 
is presented.
After a digital service or good with strong network effects reaches its critical mass, 
it usually undergoes a period of rapid growth until the market approaches saturation. 
The strategic dilemma is how to reach critical mass in a brief period. If this period is 
too long, there is a certain possibility that the service will be prematurely terminated. 
.
Figure 
9.9
 shows the number of active monthly users on Facebook for the period 
from 2004 to 2015 (Roberts, 
n.d.
). Observe that critical mass was reached in 2008, 
after 4 years of slow growth. Thereafter, Facebook grew rapidly. Other social network 
services, such as Twitter, have undergone a similar evolution.
Network effects range from concrete and easily identifiable ones to vague and 
less obvious occurrences. Easily identifiable network effects are those where physi-
cal objects or users interact directly with each other. Examples include telephone 
networks, computer networks, social media, and multiplayer online gaming. These 
networks usually exhibit strong direct network effects, meaning that the network of 
users is highly connected.
0
500
1000
1500
2000
2500
3000
2012
2013
2014
2015
2016
2017
2018
2019
2020
Million users
Facebook DAUs and MAUs
Daily active users (DAU)
Monthly active users (MAU)
. Fig. 9.9 Facebook 
users in the period from 
2004 to 2015. (Authors’ 
own figure)