http://www.skrenta.com/2007/06/are_network_effects_getting_we.html

Rich Skrenta, a silicon valley entrepreneur, writes about everything Web 2.0 on his blog. In this post he explains the links between the Web 2.0 phenomena that we see every day and network effects. In this specific post, Skrenta writes about the rise and fall of a number of different social networks on the web right now. He explains that his main social networking tool was, at one point, LinkedIn; however, recently the majority of his contacts in the valley have moved to Facebook, so now he too has made the migration. Skrenta also explains how MySpace gained popularity through network effects and will continue to have users because of its large user base. Then Skrenta explains how he thinks that social networking in Web 2.0 is an example of how network effects are weakening. He cites the fact that so often new sites pop up and everyone migrates to the new site. For instance, there has been a migration from MySpace to Facebook, but only a few years ago users were signing up to MySpace. He also relates this to the newest, hottest restaurant in town which gains popularity quickly, but then loses it again just as quickly.

Web 2.0 very obviously exemplifies network effects, especially social networking. As we discussed in class, network effects cause a product to gain value to consumers depending on the number of people that use the product. It seems that this occurs on social networking sites; if nobody is using Site X, the site has no value to me, because I would not be able to connect to anyone else by using the site. As soon as Site X gains one user, it has gained some value to me because I can now connect to one person. This continues until there everyone is on Site X, which is when it is most valuable to me because of all of the connections I can make. I feel that Skrenta’s idea that network effects are weakening was not accurate. How he described that was that Site Y might come along and we see a migration of everyone from Site X to Site Y. Network effects are certainly still at work here, they are what cause everyone to move to Site Y this time. What we cannot see is how Site Y gained its first users without any value to anyone, however there are certainly ways to get them; (we were asked to contemplate this in the last problem of Problem Set 5.) One possibility might be a lower barrier to entry than Site X has.