Quotulatiousness

July 13, 2017

QotD: What are “network effects”?

Filed under: Business, Economics, Quotations, Technology — Tags: — Nicholas @ 01:00

Few buzzwords are hotter in tech circles than “network effects.” This was so 15 years ago, when I was an MBA candidate grinding through job interviews; it is so today. Probably, when the heat death of the universe is imminent, and our nine-tailed descendants are trying to figure out what to do, some bright Johnny will suggest we can keep things going if we can just add another 2 billion stars to our user base.

Don’t get me wrong: Network effects are important, and I frequently talk about them in relation to everything from media companies to neighborhoods to choices about motherhood. But when I hear the term, the hairs rise on the back of my neck, because it’s often used imprecisely. People say “network effects” when they are really talking about switching costs, or regulatory coordination, or spillover effects, or any number of other things that are at best tangentially related to what the network effect model was built to describe.

Worse, far too many people seem to use the term the way college sophomores deploy the names of philosophers they have just read, in the mistaken belief that a piece of jargon can magically banish disagreement. Your firm doesn’t seem to have a viable revenue model? You’re just saying that because you don’t understand network effects! Someone seems insufficiently worried about the market power of some technology behemoth? It must be because that benighted fool has never heard about network effects!

Network effects are a useful concept, but not when deployed in this slipshod way. Worse, such careless routine deployment actually threatens the concept’s usefulness in conversations where it does offer real insight.

So just what is a network effect? The term describes a product that gets more valuable as more people adopt it, a system that becomes stronger as more nodes are added to the network. The classic example of network effects is a fax machine. The first proud owner of a fax machine has a very expensive paperweight. The second owner can transmit documents to the guy with the pricey paperweight. The thousandth owner has a useful, but limited, piece of equipment. The millionth owner has a pretty handy little gadget.

Megan McArdle, “Facebook Is Big, But Big Networks Can Fall”, Bloomberg View, 2015-10-08.

July 12, 2017

The real newspaper problem is not Facebook and Google … it’s their monopolistic heritage

Filed under: Business, History, Law, Media, USA — Tags: , , , , — Nicholas @ 03:00

Tim Worstall argues against allowing US newspapers to have an anti-trust exemption to fight Facebook and Google:

The first thing to note is the influence of geography and transport. By definition a newspaper needs to arrive daily — in physical format least — meaning that there’s a useful radius around a printing plant which can be served. What then happened is exactly what is happening with Google and Facebook, network effects come into play. Each urban area effectively became the monopoly of just the one newspaper. Sure, there were more than that in New York City for example, SF supported two majors later than many other places. But even in such large and rich places we did really only ever end up with one “serious” newspaper.

The network effects stem from the revenue sources. Roughly speaking, you understand, one third came from subscription revenues, one third from display advertising and one third from classifieds. Classifieds are a classic case of said network effects. Everyone advertises where they know everyone reads. Everyone reads the ads where they know everyone advertises those used baby bassinets. Whoever can get ahead in the collection of either then almost always wins the race. Classifieds are also hugely, vastly, profitable.

The way that American newspapers are sold, on subscriptions with a local paper boy, also contains elements of such network effects.

The effect of this economic structure was that each major urban area really had the one monopolist newspaper. This is where that famed “objectivity” comes from too. If there’s going to be the one newspaper then it’s going to try to make sure there’s no room for another by steadily occupying the middle ground on anything and everything. This is just the Hotelling problem all over again. Swing too viciously left or right (on any issue, political, social, whatever) and there might be room for someone to sneak in from the borderlands. Thus the very milquetoast indeed political views at most of these newspapers.

[…]

And that, I insist, is what is really happening to US newspapers. Most certainly, their problems stem from the internet. for the internet broke that monopoly imposed by economic geography and all else stems from that. They got fat and happy within those monopolistic areas and their pain is coming from the adjustments necessary to deal with that. The likely outcome I would expect to be many fewer first line newspapers staffed by many fewer people in much the way that the UK market has worked for near a century now. I would also expect to see them using political stance as a differentiator just as in Britain.

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