I was perusing the web and stumbled across an interesting article that was directly related to the concept of Network Effects that we learned in class.  It might be an older article, but the fact that it substantially related to class - and did not revolve around two current-day Network Effect giants, Myspace and Facebook - piqued my interest.

While those two aforementioned social networking portals may be in the spotlight today, another well-known web service that highlights the concept of Network Effects is: del.icio.us.  The service itself exhibits network effects because as more and more people use the service, the more value it offers to its users.

The success story, as told by Forbes, goes like this.   In 2001, Joshua Schachter started a simple website that organized a list of links of his favorite websites.  His friends joined in and added thousands of links more to the list.  The list became so big that Schachter created an application to manage these links by giving each a tag.  The website became more and more popular, and thus he relaunched the website as del.icio.us.  The service relies on user participation to achieve its greatest value.

Now, del.icio.us is actually a little bit different than a telephone, fax machine, or even Myspace.  In our last homework question, the issue was raised about raising enough critical mass for the product to have enough perceived value to out-compete its rival.  Del.icio.us is unique in that the service itself is useful for the first user. Individually, it still helps users manage their information online.  “For a system to be successful, the users of the system have to perceive that it’s directly valuable to them,” Schachter says. “If you need scale in order to create value, it’s hard to get scale, because there’s little incentive for the first people to use the product. Ideally, the system should be useful for user number one.”

While useful to one person alone, the service itself proved to become even more valuable as user participation skyrocketed.  As the article points out, something interesting happened: on the aggregate, all the individual tags became a useful way for categorizing and organizing web pages.  The more people used the service and created tags, the more accurately organized and powerful the service became.

The article then starts talking about “folksnomies”, which I will not dive into because it is irrelevant to our class so far.

Of course, del.icio.us is different than that of other goods brought up during class and in our textbook such as fax machines, telephones, and other goods in that users do not have to pay a fee to use the good.  But the idea of increasing value as a function of increasing number of users is still the same.

The article, on Forbes, is here: http://www.technologyreview.com/tr35/Profile.aspx?TRID=432&Cand=T&pg=1