The Network Effect. It's the new game in town, and it's all about building market share, creating buzz, and co-opting an entire market space. Why does it make sense for software companies to give away their products? It's the Network Effect at work. The more people, companies, and Websites that are linked together, the greater the benefit to each of the participants. The more people who use your software, the more likely it is to become a de facto standard, spawning an add-on industry of its own.
Take Adobe's PostScript, which today is a deeply rooted standard for transmitting print-ready files. How did it get that way? Back in 1984, Adobe's John Warnock had convinced both the developers of the new desktop publishing applications and the manufacturers of low-cost laser printers to adopt the PostScript page description language. Soon, PostScript had a lock-in so strong that the combined forces of Apple Computer and Microsoft were never able to shake Adobe's hold.
Counter-example: Three years ago, Trip Hawkins' video game company, 3DO, had a superior technology and a brilliant business model. By offering game developers a big chunk of the action and providing them with a robust development environment, 3DO wooed them away from competitors' platforms. Running the snazziest games on the sexiest video game player, Hawkins' team thought they could create market demand to fuel their growth. Unfortunately, one side of the network equation was missing. 3DO's technology partner, Matsushita, needed to make a profit on the game player hardware it had built to 3DO's specs. 3DO had the razor blades, but Matsushita couldn't afford to give the razors away.
Whether you create market momentum by seduction or coercion, by giving products away for free or by bundling them together, once you've created a network of interdependent players, each of whom benefits every time another player is added to the network, you've created a value engine.
But there's more to the Network Effect than connectivity and standards. To make it work for you, you'll need to combine ubiquity with stickiness, mobility, community, total solutions, and the personal touch.
SCARCITY NO LONGER DETERMINES VALUE
Economists have been writing about the Network Effect since 1974, intrigued by the notion that, once a network is established, scarcity isn't the source of perceived value; instead, ubiquity is. In the physical world, the more fishers who come to a lake, the fewer fish each one will catch; the lower the benefit, and hence the value, for each one. In the cyberworld, on the other hand, the more people who participate in an online network, the greater the benefitthe larger the network, the greater the likelihood that you'll find the person, information, or resource you're seeking. The difference between these two analogies is simple. Fishers aren't adding fish to the lake; online users are. As each new Website goes online, it adds to the common resource pool not only the information and resources it contains but also the server(s) and bandwidth it brings to the network as a whole. As each new person registers her email address, that's one more person with whom you can communicate quickly and easily. Connections and information are no longer scarce resources in the Internet economy. The one resource that's becoming scarcer and scarcer (and therefore more valuable) is customers' time.