PROJECT NETWORK
1. DETERMINING THE TYPE OF NETWORK EFFECT: Direct or Indirect
It is a direct network effect when the value of a good changes as more agents consume that good. Example: eBay
It is an indirect network effect when the value of a good increases as the number, or variety, of complimentary products expand. Example: operating systems and DVD players
2. DETERMINING THE LEVEL OF INTENSITY: Interactivity and the three sub-categories of Compatibility -- Transactions, Community and Devices
2a. How interactive is the network?
The more contact among end users, the stronger the potential network effects. The S-curve of product adoption is much steeper for an interactive network than a non-interactive network.
2b. How compatible is the network, defined by "transactions?"
Transactiional compatibility derives its value by creating a forum for exchange. If the exchange captures the majority of buyers and sellers in a particular space, competing exchanges can never reach critical mass. Example: eBay
2c. How compatible is the network, defined by "community?"
In networks with direct interaction between members, value grows as more participants join the community. Once a community has gathered, content providers, advertisers, and vendors are willing to pay to access that community. Example: AOL
2d. How compatible is the network, defined by "devices?"
As the functions of ancillary devices, services and software increases, the value of the device increases. Examples: VCRs, DVDs and operating systems
3. IDENTIFYING THE REVENUE SOURCES AND THEIR POTENTIAL
3a. Commerce/Transactional Revenue
Selling goods directly or collecting a fee to steer the customer to a transaction. Large networks that can effectively direct users are very valuable.
3b. Advertising Revenue
The larger the network, the more appealing to the advertisers. Giving away the use of the network is an expensive way to build its size.
3c. Subscription Revenue
Usually applies either to the small, specialized network or the large network that can command the fee.
3d. Data Revenue
Data about the customers can be sold to third parties.
3e. Incubation Revenue
A network can take equity stakes in related companies. The network promotes the companies for a fee (and has potential upside to the investments.)
4. ADOPTION POTENTIAL: Assessing the Adoption Threshold, the extent of Clustering and Cluster Connectors, and Potential Adopters
4a. The Adoption Threshold -- more like 6 or 60 degrees of separation?
The adoption threshold is defined as the number of people who must engage in a network activity before a given individual joins the network. As a result, an innovation spreads much quicker over a network that has an average 6 degrees of separation than one that has 60.
4b. Clustering
The degree to which the connectors to one node also connect to another. The more, the better.
4c. Long-range Connectors
The more long-range connectors between local clusters, the better.
4d. Potential Adopters in the Established Clusters
The potential value of a network increases not from having more people on it, but from how many non-adopters are in the social cluster of the adopters.
5. ASSESSING GROWTH -- Examining the Positive Feedback, Critical Mass, the Natural Monopoly, the Cost Structure, and the Switching Costs
5a. Is the Positive Feedback Demand-side Driven?
The primary source of positive feedback is the network effects which are demand-side driven, as opposed to the example of manufacturing companies which enjoy the benefits of economies of scale that are supply-side driven.
5b. Critical Mass: If it hasn't been achieved, when will it be achieved?
Most networks never get to critical mass. Once a network achieves critical mass, users want to join at the expense of competing networks. (Critical mass occurs at the start of the tornado. All issues about the constraints to forming of a tornado are critical to discussion of achieving critical mass.)
5c. Does (or will) a Natural Monopoly exist?
IP-based networks can garner market share unthinkable in the physical world. Any network not in first place is an also-ran.
5d. Incremental Costs: Are they low? Are most costs incremental or fixed?
A surge in sales driven by demand-side effects coupled with negligible incremental costs of providing the product leads to significant value creation. For an information business with a cost structure based on 90% fixed costs and 10% variable costs, margins rise four-fold as output doubles.
5e. Switching Costs: Are they high?
The customers' switching costs include the cost of implementing the new system and the cost of losing interaction with the users of the network being exited.
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Remember that all of the above is nothing more than a point of departure for discussing the strength, quality, and potential of networks using the concepts explained in "Network to Net Worth." I hope we can improve upon them with the hope that they might become a format for presenting networks to our thread.
Let the discussion begin!
--Mike Buckley |
