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[Whitepaper] The Digital Revolution of Society: The Network Effect

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The spread of new technologies begins with the IT infrastructure

Technologies could only spread when the infrastructure was right, and that was a big challenge
for a long time. 

When the Internet became available to private households, it was initially so slow, and at the same time so expensive that its use and possibilities were severely limited. However, the faster and cheaper a good connection (keyword broadband) became, the more areas of application developed.

Let’s Take A Look At Netflix… And Chill

Netflix, for example, could never have established itself via modem – and did not attempt to do so in the beginning. Instead, the streaming service began sending CDs and DVD’s through the mail to its customers. It wasn’t until broadband connections enabled UID streaming of movies and series over the Internet that Netflix was able to begin its real triumphal march. Netflix’s success quickly attracted other competitors as well. Hulu, Amazon Prime/Amazon Instant Video, Maxdome etc. … The list is long.

According to expert estimates, video on demand streaming services will overtake traditional television by 2020. Michael Westphal, head of the Streaming Media group (Eco provider association), is convinced that Netflix will have 11 million subscribers in Germany alone by 2020. Currently almost 70% of all 18-29 year olds use the services of Amazon Prime, Netflix or Maxdome. A representative statistics study has shown that it is precisely the lack of advertising (surreptitious advertising and product placement excluded) that makes screening services so successful. Even more decisive for success, however, is a completely different factor: 84% of respondents mentioned the free time management of on-demand offers. Especially in combination with fast Internet connections, it enables users to consume LMS and series exactly when they feel like pausing them at any time and resuming them without delay.

Welcome To The Social Media Age

In the social media age, the network effect is becoming more and more relevant. Within social media, the interrelationships between benefits and number of users can be significantly strengthened once again. Platforms such as Facebook, which can only really implement their concept with a large number of users, are particularly favoured by the network effect. The so-called “Facebook curve” illustrates the exponential growth of the company, in which sales (which mainly stem from advertising revenues) have been skyrocketing virtually parallel to the number of members since 2007. The more members Facebook has, the more members are directed to the platform by the many already registered members. With each new user, the direct network effect takes effect. At the same time, the indirect network effect allows Facebook to reach critical mass much faster with new applications such as Messenger.

The same phenomenon can also be seen in other sectors. Uber, which is a more cost-effective alternative to the traditional cab driver’s business, has managed to turn the industry upside down in the shortest possible time. Taxi companies, which had previously rested on their monopoly and increasingly shone with unfriendly service, suddenly lost customers. The more over-drivers there are on the roads, the more comprehensive the company will be able to offer its services and the more users will be convinced by the company’s offer, since availability and value for money are of central importance in the taxi business.

Creating New Monopolies

The network effect can dissolve existing monopolies, but can also create new ones. The examples Facebook and Uber illustrate that the network effect can break with existing monopolies on the one hand and initially lead to a loosening of the market by new providers. However, the network effect can also favor the formation of new monopolies in a similar amount of time. In today’s networked world, only those companies that offer customers the greatest added value and at the same time can reach a critical mass of users as quickly as possible have a realistic chance of succeeding in the marketplace. This phenomenon became known as ‘winner takes it all’.

Can There Only Be One At The Top?

The winner takes it all principle states that there can only be one leading company at the top. Google, Apple, Facebook and Amazon (GAFA) are all leading companies in their industry, whose competitors are often far behind in second place. Do you still remember ICQ or MSN Messenger? Many social networks have failed in the competition with Facebook.

What do Nokia or Kodak do since Apple took on both companies (of different industries!) with only one superior device the basis of business? How many bookstores and publishers have closed since Amazon began publishing and distributing books?

In principle, marketplaces tend to form monopolies due to the network effect. The competitors always try to undercut the competition in price or otherwise and to win customers. Mergers often occur in order to maintain the business basis. In the case of Uber, more and more private taxi companies are joining the big company earlier and earlier in order to put an end to an unprofitable competition. 

Accordingly, defacto new monopolies are created very quickly, even if they are still officially different companies despite the merger. The larger this merger becomes, the more competition is gradually weakened and eventually left behind. So, does the “winner really take all”?

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