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  Blog \Blôg\, n. [Jrg, fr. Jrg. "Web-log".
     See {Blogger, BlogSpot, LiveJournal}.]
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Wednesday, November 20, 2002
11:36 - A thought on network effect
http://denbeste.nu/cd_log_entries/2002/01/fog0000000140.shtml

(top) link
Den Beste has mentioned "network effect" several times as evidence that Apple is doomed and Windows will achieve 100% penetration. From his original article on the subject:

There is a marketing term: "network effect". It refers to the fact that for some kinds of products, the product becomes more valuable to each individual customer as more and more people buy it. Companies love this if they can get it, because there's no manufacturing cost associated with network effect, so the value (and potentially the sales price) of the product can rise and thus profit margins can increase.

The effect exists; I'm not going to argue that. It's a truism of humanity that the more the people around you do something, the easier it is for you to do the same thing.

But I have to wonder whether the effect will lead to where Den Beste thinks it will. I find myself thinking that the result of network effect on any given niche depends heavily on circumstance; it's not a foregone conclusion that it will lead to homogeneity.

My thought is that network effect is only really potent when the choice in question is in fact a choice. I'd say network effect was absolutely instrumental in Windows attaining the critical mass that it achieved in the mid-to-late 90s. Back then, a new computer user was an informed buyer, someone with geeky tendencies, who knew what a computer was supposed to do and what he wanted to do with it. He had a choice between Windows and a Mac; he weighed the merits of each, and eventually the fact that all his friends were using Windows because it was cheaper and had more software won out. That's network effect in its purest form.

But that's not the case these days. Using Windows isn't a choice, it's a default. New computer buyers don't know what operating system their computer runs any more than they know what encoding standard their phone uses. Network effect doesn't enter into the buying decision; when someone is getting a new computer, it's going to run Windows. Only if the user is savvy does he weigh the relative merits of Windows and the Mac-- and such users, though it may not look that way from within the blogosphere, are vanishingly few. They're not a significant part of the numbers which drive sales.

It's at a time like this that network effect actually can work in favor of the niche player. My personal experience tells me this. Time was, after all, that nobody wanted to use any Apple products; the Mac was seen as a "toy", the Mac OS was seen as limited and restrictive and unstable, and Mac users were usually simply called "gay" and left at that. (Network effect in reverse.) But these days, the situation is quite different. People come up to me to see my iMac and my iBook and ask questions about it-- what it can do, how much it weighs, how much it costs-- quite unprovoked. They're seeking it out. If I flash my iPod while in line for burritos, people's heads turn my way and I get to show it off to a genuinely admiring audience, rather than having to hide it from people who think it makes a statement about my sexuality. (I just saw an iPod on the title-card sequence for "Modern Marvels: Boys' Toys" on the History Channel.)

And that, too, is network effect.

Using a Mac is starting to be seen once again as something real people do. Everybody has a friend who uses a Mac-- and such people are more common than they were a couple of years ago, at least in my experience, anecdotal though it may be. The "Switch" ads are putting memes into the water. Everybody knows what an iPod is and what an iMac looks like. OS X gets high-profile billing in movies like Men In Black II. People create videos in iMovie and photo books in iPhoto. Apple Stores present hip and inviting facades to passers-by in high-income malls. There are more games being produced for the Mac platform than there ever have been since the mid-90s. These things enter the collective consciousness. And they're doing it more now than they used to.

One of the most common refrains here at work is "When I get my Mac..." --and a big driver for that is the fact that there is already that crucial seed of shock troops within the company who have already bought Macs and are visibly happy with them. That makes it easier for more people to consider, "Hey, now, maybe these things are worth looking into. Sure can't be worse than this Windows box, can they?" And when a friend sees my iPod and plaintively says, "God, everybody has one of those except for me!"... it means an imminent sale is dependent only on whether it turns out to be in the guy's budget for the month.

When those around you are increasingly making a certain choice, you're more likely to make that same choice yourself. I see that happening with Apple products more and more these days. But I don't see it happening with Windows anywhere near as much, because to use Windows first has to be a choice that one has to consciously make.

I suspect that network effect is only really valid in a plural market, is what I'm saying. It confers the most momentum to a product or company while that company is a minority and on the rise, but its potency falls off as that product or company achieves near-total penetration. Beyond that, other effects take over-- more volatile ones, depending largely on PR, economics, design, and luck. Anything can happen. But in a situation like we have today, I don't think network effect is really something Apple has to worry about as much. Instead it's an ally, as long as they can keep it fed and don't blow it.

Popular opinion toward Apple is curious among the casual and respectful among the savvy; the zealous are zealous as ever, but the hostile are a vanishing bunch. This is a much different environment from what it was two or three years ago. Apple is no longer a pariah-- and whatever its products' numbers might look like, the environment is a rich one for growth.

OS/2 failed because while it was a niche player with a similar position to Apple's, it didn't bring anything to the table that was compelling and hip, the way Apple does now. Good as it was, it didn't have an exclusive "killer app" that IBM could show off on TV and build consumer lust. There wasn't any reason for the man on the street to think, "Hmm, OS/2-- that's cool stuff, right? I oughtta go get me some of that!" Nor was there for Be, which had cool idealistic prospects, but nothing concrete for people to latch onto. But aha... Linux started off as a niche player, and it had the crucial network-effect ingredient that it brought something desirable to the table-- something that would overcome its minority position and gather adherents even in the face of overwhelming opposition from the status quo. Somehow that worked. Linux brought a concrete benefit to people who wanted to make an informed choice and achieve something specific. And that's what Apple is doing too; that's why Apple is better equipped to survive in its current market than, say, OS/2 was.

Or maybe I'm just on crack.

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© Brian Tiemann