The term ‘Network Effect’ in common parlance means a phenomenon where a product or a service gains value as people continue to use and increase its usage. I think one of the most pertinent examples in this context is that of the internet. Initially when it was introduced, there were hardly any takers and most people did not understand or appreciate its true value. But as its usage spread beyond military officers and research scientists, more and more people started understanding its true import. More websites started getting created, and the number of people who used them to communicate with each other started growing in leaps and bounds. Today it has become an absolutely valuable intellectual property.
Creating the Utility Value
Therefore, one of the biggest challenges for any product or service is to create this eventual utility value. Basically, the awareness needs to be created amongst a sufficient number of people and potential users for the network effect to finally take hold. Till such time that the requisite number if users avail the services, or the product reaches its critical mass, it can be safely assumed that it will continue to get attention and users who would be constantly wowed by the utility aspect.
However negative network effect sets in when too many people start using a certain product. For example let’s again consider the internet, at certain times when a disproportionate number of people are using the service, it is quite possible that the speed might deteriorate, utility for users would come down and the over network effect turns negative. Therefore, it becomes imperative for users of new service or product to make space for scaling up and creating more room for capacity increase to maintain the network effect at a certain fixed point at all times.
Advantages Of Network Effect
Some of the biggest benefits of network effect include:
- Helps manufacturers and service providers achieve critical mass and consistently work on trying to maintain it
- Highlights the scalability necessity and opportunity in any product launch or service
- A major benefit to the society as it positive relates to as well affects the Intellectual Commons and Property Rights
- Promotes P2P sharing or peer to peer network sharing which helps in positively sharing intellectually property between peer members
- Creates better incentives for creators of intellectual property and automatically expands their reach prospects.
Disadvantages of Network Effect
However, beyond a certain point network effect suffers certain negative impact as well:
- Efficiency is hampered due to congestion or overuse of limited resources
- Congestion leads to slow down and sometimes even decrease in relative value of a service or a product
- Removes the edge from a specific product offering as a result of unaccounted for system overload.
It can be easily concluded given the cut-throat competitive atmosphere we operate currently, network effect is almost like a resource mine. Steady, intelligent use will yield positive results but irrational and overuse will create trouble.