1b. The Basics: Network Effects and Architecture

Question 1

What is network effects? Both positive and negative

Answer 1

Network effects: refers to the impact that the number of users of a platform has on the value created for each user.

Positive: refers to the ability of a large well-managed platform community to produce significant value for each user of the platform. it is the main source of value creation and competitive advantage in a platform business

Negative: refers to the possibility that the growth in numbers of a poorly managed platform community can reduce the value produced for each consumer

Question 2

What is demand economies of scale?

Answer 2

In contrast to supply economies of scale (which is driven by production efficiencies – reducing costs), demand economies of scale is driven by efficiencies in social networks, demand aggregation, app development, and other phenomena that make bigger networks more valuable to their users

It is the fundamental driver of positive network effects. It creates non-linear convex growth. The phone is an example. Technology makes phone => more demand leads to more demand

Question 3

What is two-sided network effects?

Answer 3

When consumers attract producers, and producers attract consumers.

Firms will often spend money to attract participants on the one side of the market in order for the other side to join in. The only proviso is that the profits to be earned in market B must outweigh the losses incurred in market A

Question 4

Other growth building tools than network effects

Answer 4

Price effects: Special offers etc. Hard to sustain

Brand effects: When people associate a brand with quality. Expensive and hard to sustain

Virality effects: Going viral - attracting people to a platform. But the network effects keep them there

Question 5

What is frictionless entry?

Answer 5

Frictionless entry is the ability of users to join a platform and begin participating in the value creation the platform facilitates quickly and easily. Frictionless entry is a key factor in enabling a platform to grow rapidly

(Note: Scaling a network requires that both sides of the market grow proportionally)

Question 6

What is side-switching?

Answer 6

When those who consume goods or services begin to produce goods and services for others to consume. Producers become consumers and consumers become producers

Question 7

Negative network effects explained

Answer 7

A negative network effect occurs when the growth in numbers that enables more matches between the consumers and producers also leads to an increasingly difficulty, or impossibility, in finding the best match. To avoid this dilemma, frictionless entry must be balanced through effective curation

Question 8

What is curation?

Answer 8

The process by which a platform filters, controls, and limits the access of users to the platform, the activities they participate in, and the connections they form with other users. Reduces negative network effects

The larger your network growths, the better your curation can become (due to the increased data) – a phenomenon we refer to as data-driven network effects

(The naked hairy man problem - Chatroulette example, when a network grows without policing - leaving others to leave the network)

Question 9

What is same side effects - both positive and negative?

Answer 9

The effect that consumers have on other consumers, and producers have on other producers

Positive: The positive benefits received by users, when the number of users of the same kind increases e.g., the phone, gaming platforms etc

Negative: When it becomes more difficult to find the right match due to an increase in e.g., suppliers (Example with Graduateland)

Question 10

What is cross-side network effects - both positive and negative?

Answer 10

The effects that consumers have on producers and those that producers have on consumers

Positive: Occur when users benefit from an increase in the number of participants on the other side of the market. Does not have to be symmetrical - One side can easily grow more than the other. E.g., VISA, more merchants increases convenience for consumers, and vice-versa

Negative: The more adverts there are on a website (or adverts on google or Facebook), the less users want to be on that website

Question 11

In every exchange, the producer and consumer exchange three things:

Answer 11

Information: Every platform interaction starts with the exchange of information. This information enables the parties to decide whether, and how, they want to engage in any further exchange

Service or good: As a result of the information exchange, the platform participants may decide to exchange valuable goods or services as well (The value unit). May happen outside of the platform

Some form of currency: When goods and services are exchanged, they are typically paid for using some form of currency - traditional monetary currency, attention, likes, influence etc.

Question 12

What is a value unit?

Answer 12

Each item exchanged among platform users. (remember the case of Instagram and Facebook in which the value unit is the sharing of respectively photos and content)

Question 13

What is the core interaction and its three components?

Answer 13

The core: This is the most important activity taking place on a platform. E.g., LinkedIn - connecting professionals with other professionals. Core interaction = participants + value unit + filter. It is the “why” of the platform

The participants: The users (consumers and producers). The platform should make role switching easy

The value unit: The products or services made by the users exchanged on the platform. Platforms create the “factory floor” - they build the infrastructure within which value units are produced

The filter: A filter is an algorithm, software-based tool used by the platform to enable exchange of appropriate value units between users. A well-designed filter ensures that platform users receive only value units that are relevant and valuable to them. E.g., Facebook. Your news feed algorithm, based on signals you have given in the past through your interactions with previous content. The platform can foster a culture of quality control and develop filters that are designed to deliver valuable units while blocking others

Question 14

The how of the platform: Pull, Facilitate, and match

Answer 14

Pull: Getting people to the platform (the chicken or the egg problem - users come, when there is value. There will only be value if users come) and making them stay there. The platform should make use of single and multi-user feedback loops

Facilitate: One aspect of facilitating interactions is making it as easy as possible for producers to create and exchange valuable goods and services via the platform (e.g., Instagram making it easy to upload pictures compared to Facebook). It may also involve reducing barriers to usage. However, in some cases, increasing barriers has a positive effect on usage (e.g., finding babysitters)

Match: A useful platform creates efficiencies by matching the right users with one another and ensuring that the most relevant goods and services are exchanged. It accomplishes this by suing data about producers, consumers, the value units created. Using a data acquisition strategy

Question 15

What is feedback loops? both single and multi-user

Answer 15

Feedback loops create a constant stream of self-reinforcing activity - making the users come back

Single-user feedback loop: Involves an algorithm built into the platform infrastructure that analyses user activity, draws conclusion, and recommends new value units and connections

Multi-user feedback loop: activity from a producer is delivered to relevant consumers, whose activity in turn is fed back to the producer. With FB, likes and comments serve as feedback to producers

Question 16

How to layer new interactions on top of the core interaction?

Answer 16

By changing the value unit exchanged between existing users

By introducing a new category of users as either producers or consumers

By allowing users to exchange new kinds of value units

By curating members of an existing user group to create a new category of users

Question 17

The end to end principle

Answer 17

Activities that are not central to the workings of the network, but valuable only to particular users should be located at the edges of the network rather than at its heart. In this way, secondary functions will not interfere with or draw resources away from the core activities of the network

Question 18

Modularity

Answer 18

Modularity is a strategy for organising complex products and processes efficiently. A modular system is composed of units (or modules) that are designed independently but still function as an integrated whole

Subsystems can be designed independently as long as they adhere to overall design rules and connect the rest of the system only through standard interfaces

This way, if one module in the system fails, the other modules will not fail with it

(Application programming interfaces (API) – such as Google Maps, Salesforce etc.)

Question 19

API

Answer 19

API is the acronym for Application Programming Interface, which is a software intermediary that allows two applications to talk to each other. Each time you use an app like Facebook, send an instant message, or check the weather on your phone, you’re using an API

The kitchen is the part of the “system” that will prepare your order. The waiter is the messenger – or API – that takes your request or order and tells the kitchen – the system – what to do. Then the waiter delivers the response back to you; in this case, it is the food.

Question 20

Iterative improvement: The anti-design principle

Answer 20

Platforms cannot be entirely planned: they also emerge. It is inevitable that participants will use the platform in ways you never anticipated or planned

The best platforms allow room for users’ quirks, and they are open enough to gradually incorporate such quirks into the design of the platform

Question 21

A DIP offering

Answer 21

A digitalized interactive platform: implies a broader view of value creation—one where value is created through interactions, versus one where value is simply the exchange of a fixed offering between a firm and its customers

Components: 
Artifacts and interactional relations
Persons and interactional relations
Processes and interactional relations
Interfaces and interactional relations

Question 22

The template approach

Answer 22

Imitating existing platforms when creating your own

Question 23

Causal Loop Diagrams

Answer 23

A way of visualising or describing complex systems and how they operate - explains causes and effects (causalities – not correlations) How A affects B. Can be used to describe network effects

Question 24

One-sided network effect vs. two-sided network effect

Answer 24

One-sided: The telephone - the more people using it, the more value. Only for consumers

Two-sided: Uber - driver and riders