Network Effects and Social Media Podcast Transcript

What are network effects and why do they matter to social media networks?  We explore the value network effects are responsible for in tech (the number might surprise you) and why many consider it a make or break for new social media networks.

TW.  Hi, I'm Taryn Ward, and this is Breaking the Feed, Social Media: Beyond the Headlines.

TW.  We're taking a closer look at the core issues around social media, including the existing social media landscape to better understand the role social media plays in our everyday lives in society. 

TW.  Over the course of this series, we've looked at how some of the most well-known social media networks started and what made them successful, and looked at some of the new challenger brands and what's made them successful, and what's made things well, challenging for them. This episode, we'll look specifically at network effects and their importance in the success or failure of a social media network. 

TW.  Our core question for today is, how does this one principle present new social networks with both their greatest hurdle and biggest opportunity? 

TW.  Let's back up. What is the network effect? Really, it's a business principle that when more people use a product or service, its value increases. The internet is a great example of this. So initially, when the internet started to function, very few people had access, very few people were using it, and they were using it for limited periods of time. So, its functionality was limited, and the way people used it was really limited. But as it became more widely used, and people relied on it, to conduct their work, to communicate with each other and to find and verify information, more people used it, it had more and more uses. More people used it, it had more and more uses, and we really saw its impact become a much larger influence on our lives. So closely entwined is this concept with social media networks social media platforms are often the first example listed or discussed. 

TW.  Wharton, for example, says the following on their website, “The network effect is especially prominent on online platforms that encourage users to add other users to the platform's network. Social networks such as Facebook and Instagram are key examples of the network effect. The more people that use the platform and an individual's network, the more likely it is that individuals will use the platform too” it's not just Wharton, again, social media is very often used as either the main example or one of a handful of examples when explaining how this works, and that's both because it's such an important component of social network growth, and because it's relatively easy to demonstrate, looking at social networks as a concept, and that checks out based on our own experiences and use numbers more generally, and this is across various social networks dating back to the 90s. 

TW.  Not only are people more likely to start to use a platform if they know people who are already on it they're also more likely to continue to use it if people they know are highly engaged, and especially if people they already know or posting content, or directly communicating with them to the platform. There are several different specific types of network effects and ways of talking about network effects, direct and indirect, one-sided and two-sided. But the basic concept is the same. 

• More users means more value means more users means more value. 

TW.  If we think back to our episode on social media and smartphones, we can see how this worked with, for example, Facebook and Apple or Apple and Twitter, the ability to access social networks on the go, and not just access them but create ensure content, engage, communicate with people directly, men, people started spending more and more time on those social networks. But it also meant that they started spending more and more time on their smartphones, and it helped to move smartphones from being something that was primarily used for work towards something that had multiple varied uses and of course, this increased the value of smartphones. 

TW.  As more people started spending more time on social media, there were more opportunities for social media platforms to sell advertisements, which we could all access more easily and more often, thanks in part to the normalisation of near-constant smartphone use. In other words, both smartphone sales and social media advertisement sales benefited from more and more people using both social media networks and smartphones. But it's also about the networks themselves. Facebook is a great example. When I started using Facebook at university or college, to use the US term. It was about connecting with peers and sharing photos from our exciting new digital cameras for the first time. I used Facebook then to see what people were doing, where they were going and who they were spending time with. But it was a limited circle of people who I mainly saw every day anyway. 

TW.  When I started law school, my network expanded so that it became a way to keep up with people I was spending time with every day and people I saw and spoke to less frequently because we're now living in different cities. It meant that I spent more time on Facebook, not only because I had more connections on it but also because I had multiple different kinds of connections. So, I could engage with them all in one place, regardless of whether I saw them every day or I spoke to them less frequently. 

TW.  As I got older and the platform evolved and smartphones eventually came into the mix, family members started to join and then eventually colleagues. This increased my ties to the platform further still, all of this meant that I was spending more time on the platform and millions of other people were to, which meant that the value of Facebook continue to increase and their ability to improve, their offerings also increased and the cycle continued. When groups on Facebook started to become more popular and relevant, that became another further tie, and at various points, there were even some professional tie-ins for me, the content started to be more varied, which for a time, at least, for me was positive. And I spent more time on the platform still, again, with a lot of other people in the cycle continued value increased, more time spent on the platform value increased better offerings, all of these things fed into people spending more and more time on social media networks, and similar things happen with other networks. Facebook is really just one example, and it's an easy one to talk about because everybody's familiar with it. 

TW.  On some networks has happened more slowly and some more quickly. But the concept and the potential to add huge amounts of value remain consistent. The impact of this really can't be underestimated. One VC firm estimates that network effects are responsible for 70% of the value created by tech companies since 1994, Facebook, LinkedIn, Instagram, Snapchat, Twitter, Pinterest, TikTok, all of these platforms were influenced and have benefited from network effects, but also PayPal, Venmo, Yelp, Google, Expedia, WhatsApp, Amazon, Etsy, Ticketmaster, UberEATS, DoorDash, and even Upwork. All of these companies owe some of their success or a lot of their success to network effects. 

TW.  But getting back to our core question, what does any of this mean for new social networks, it means that network effects can make or break a social media platform. I don't want to overstate how critical it is, but I'm not sure I could even if I wanted to. Network effects make it really hard for new networks to break in. Because it's rare for a new network to have it to begin with, and in fact, this is one of the biggest problems new networks face. There is an exception to every rule. Threads for reasons that we don't need to get into here. already had some of this working in its favour because of its ties to Instagram and its parent company Meta. But by and large, this is a tough hurdle that all new networks face. Network effects also provide an essential opportunity, and this is really important because if a new social network can get network effects to work in their favour, the upside is huge, and this is why even in our current economic climate, we still see some investments in consumer social that are serious and worth thinking about. 

TW.  Next episode, we'll continue to think about some of the challenges new social media networks face and what we think it's likely to mean for new social networks over the next several years. 

In the meantime, we'll post a transcript of this episode with references on our website. You can find this and more about us at TheBrightApp.com. 

TW.  Until next time, I'm Taryn ward. 

TW.  Thank you for joining us for Breaking the Feed, Social Media: Beyond the Headlines.