Network effects are some of the strongest forces in the world of technology today. They are partly responsible for the success of both traditional software, such as the Windows OS, and of services such as Google and Facebook. But what exactly are these network effects? As Wikipedia tells us, a network effect is the effect that the user of a service (or product) has on the value of the service (or product) to other users. Social networks such as Facebook are the quintessential example: the more users are in a network, the more valuable that network becomes, both for participating users and for potential new ones. After a while, people join the network simply because everyone they know is there.
Companies are always keen on exploiting network effects since they create a subtle form of lock-in. Users won't change networks unless a significant percentage of people change first, so it is much harder for new players to enter the market. This was recently demonstrated by Google+. In spite of Google's brand and marketing power, only a small percentage of users effectively adopted this new social network. The user's viewpoint is this: "All my friends are on Facebook, so I'll only go to Google+ if they go too." But their friends will only go if all their friends' friends go, and so on.
These effects also create enduring situations that make no sense from a technology point of view. Orkut, which was one of Google's first incursions into social networking, became dominated by Brazilian users over the course of a few years. As of last year, about 59% of its 66 million users, or almost 39 million people, still use the social network. This is roughly the same as Facebook's 38 million users in the country, even though Facebook is, from a technical and functional standpoint, a much better service. The network effects are what have kept Orkut going for the past few years.
Beyond social networks
Network effects go beyond social networks, however. They are, in fact, almost everywhere in technology. If we look at Microsoft Windows, their power is easy to see: most users run Windows on their PCs, so most developers will target that platform, which will make more applications available for it, which will in turn attract more users, and so on. The same thing goes for the interface metaphors in Microsoft software (menus, layout and so on), especially Office: users invest their time learning the interface because employers expect everyone to know it, making it widely used; employers expect everyone to know it because so many people use it. The more the software spreads, the more it becomes essential for everyone to know how it works, making it spread even more.
In a large way, then, network effects are responsible for setting either formal or informal standards in technology, since the importance and value of standards increase as the number of adopters increase. For the cloud, where the market is still in the early stages, and there is still little interoperability, they can play a large part in shaping the future landscape. A cloud software provider, for instance, can achieve market dominance in the same way Microsoft Office did on the desktop. A cloud platform provider can achieve dominance like the Windows OS did. And a cloud infrastructure provider can make its technology the standard for virtual machines, or for some other basic functionality such as storage or load balancing. While the power that comes from network effects isn't always abused, the risk is there.
Network effects are not "all good". There are also negative effects, like traffic and congestion, which come from increasing popularity. As the number of users increases, services can become congested, similar to what happens to roads during rush hour. At this point, the value actually decreases with the number of users, instead of increasing. Cloud providers must take care to make sure that the congestion point is greater than the expected usage level, either by increasing available capacity or by limiting the number of users.
The market dominance that may come as the result of a positive network effect can also have the negative result of creating a single target for ill-intentioned users. If everyone uses Amazon's cloud storage, then that is the only place where someone needs to break into if they want to steal information. The burden on the provider to maintain security and reliability can increase to the point where adding new users actually decreases the total value.
The cloud has the potential to bring about a revolution by breaking several of the networks that we are subject to today. With the advent of cloud-based productivity software, the importance of MS Office and other desktop productivity software may decrease. As more and more software goes to the cloud, the client OS loses relevance. We have the possibility of creating and endorsing open standards that everyone can benefit from, instead of only a few companies. For these reasons, I believe that anyone involved in technology today should have at least passing knowledge of what network effects are and how they work.
After working for a database company for 8 years, Thoran Rodrigues took the opportunity to open a cloud services company. For two years his company has been providing services for several of the largest e-commerce companies in Brazil, and over this time he had the opportunity to work on large scale projects ranging from data retrieval to high-availability critical services.