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Network effects exploited by Face Book, or why we advertise in Face Book

We think a lot about network effects: the positive externalities caused by greater connectivity. A telephone network with 100 subscribers offers 99 calling opportunities whereas one with 10 subscribers offers only 9. That is why regulators had to fight so hard to ensure seamless interconnection that would give the subscribers on each network 109 calling opportunities and compel the operators to compete on some other aspect of service.

Here below is a discussion of network effects in Face Book, that is among other things, causing us to place advertisements on it.

For an individual member, the most powerful network effects may be indirect ones that come from the huge number of unknown other people in the Facebook world. Their mass attracts, in turn, suppliers of complementary products and services.

For Windows, the enormous installed base attracted third-party software developers, which in turn drew more users. Apple’s iPhone has had a similar virtuous cycle. So, too, on Facebook, developers of applications like FamilyLink, Marketplace and iLike’s Music create a software universe with seemingly infinite choices. And that attracts more users — and still more developers.

Facebook’s decision to open its site to outside developers in May 2007 was a “transformative moment,” said Charlene Li,founder of the Altimeter Group, a strategy consulting firm.

“Because Facebook allows developers on their site, the people who would have developed the next social networking site are now working with Facebook,” she said.

Nick O’Neill, founder of AllFacebook.com, a site with Facebook-related news and statistics, said, “Games are the killer app for Facebook.” Because of their social nature, popular Facebook games produce direct network effects. The dedicated farmers of the FarmVille game — it attracts 83 million users a month — nudge friends to play and become virtual neighbors, enhancing their own game experience. (That pull gives Facebook an advantage Windows lacked; its signature game was Solitaire.)

Businesses, nonprofits, government offices and celebrities use Facebook pages to disseminate information, thus forming an ever-growing simulacrum of the Web within Facebook’s walls. Network effects are at work here, too: users attract well-known names, which, in turn, draw more users to Facebook.

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