By Ivan Gevirtz

created: Wednesday, February 15, 2006
updated: Friday, August 10, 2007

At college, we had a super-duper experimental computer network called Athena, and every student had an account.  This was way back in the Good Old Days, but even then, everyone had email.  And, even better, everyone used this snazzadelic program called Zephyr.  Zephyr was one of the first IM programs.  We loved it.  We would Zephyr our friends rather than doing our homework.  We would even *gasp* zephyr our friends our homework.  We knew when someone was logged on, and what computer cluster they were at.  It was fun, and a great way to flirt.  Heck, sometimes I would use it to pick which computer cluster I would use to pretend to work at.

All that was swell and good, but unfortunately it was limited to people on campus at my school.  I really wanted to be able to talk to people at other schools (phone calls were expensive and intrusive, and oh, by the way, you needed a phone nearby to make one, and nobody had cell phones yet).  I really wanted to chat with my sister who was also in college.  After chanting sacred incantations, and invoking numerous Gods, Greek and otherwise, I did manage to find a technogeek who could help me "chat" with my sister online.  It was no Zephyr, but it kinda worked sorta real timeish and still was cool.  But I realized that, with the exception of my sister, my IMing would be limited to other students at my school.

When Alexander Graham Bell invented the telephone, he was faced with a serious dilemma.  Who would he call?  Er, rather, who could he call?  He had the only phone!  He knew that the value of his invention was solely based on the number of people who could use it to communicate.  Each new phone hookup allowed more people to talk.  And, any true geek could tell you, the number of person to person phone connections in such a communication network scales factorially with each new person added.  That's a lot.  This is known as a positive spiral, or the networking effect.

Graham Bell, and IM both suffered from a chicken and egg problem. However, these problems tend to render the first company who overcomes them rather, uh, rich.  The reason is that they lead to natural monopolies.  The Phone Company had it.  They had the lines with the phone numbers, and no one else could conceivably offer useful phone service unless their phone numbers worked with the system.  Even cell phone companies had to work with the old phone lines in order to get users.  Otherwise, you would just have a walkie talkie!  AIM (AOL Instant Messenger) had the first network with a user base for IM, and thus managed to win "owning" the IM network.  They still have over 50% of all IM traffic.  They got the users first, built the first network of users, and, because everyone else was on it, everyone new went with it.  eBay has won, via the same network effect, for auctions.  eBay has the most sellers, so if you're looking to buy you'll get the best deal if you go there.  Similarly, eBay has the most buyers, so if you're looking to sell, eBay is the place to go for the best options.  They have a vast majority of the worlds online auction transactions.

I worked at when they launched their auction site.  It was a secret project.  And it was a tremendous hack.  But it was built fast.  Amazon's motto at the time was "Get Big Fast!" because they knew the importance of the network effect.  And, unfortunately, for auctions, they didn't get big enough fast enough.

There are other "winner take all" areas on the Internet, areas where owning the network of users would lead to a natural monopoly.  In some of these areas, there is no clear winner.  Dating sites may be one such area.  Real estate, apartment, and roommate sites may be others.  Have no fear, however, these industries are ripe for consolidation, and someone with deep pockets is guaranteed to do so when the time is right.  Craigs List has already done so in some ways.

Social networking sites, such as Friendster, MySpace, LinkedIn and the like are also ripe for a big player to consolidate.  But the key here is consolidate, not compete.  Converting a user is hard.  Buying them and giving them more options is expensive, but much more effective.  It is exceedingly hard to uproot an entrenched player in a business that exhibits this network effect.  The one well proven way is to offer full interoperability -- to bridge existing networks and providing a coherent functional abstraction layer that crosses the disparate implementations.  AOL actively tries to make sure that applications like Trillian don't work well.  Trillian provides the ability for a user to simultaneously use AOL, MSN and other IM networks.  Applications like this abstract away the fact that you are using AOL's hard won network of users, while simultaneously allowing you to chat with users who are still using the AIM client.  They give you a unified buddy list, across all service providers.  And they take away the monopoly that the network effect gives.

Nobody will use an Internet/cell/whatever phone if it can't connect with the POTS network.  Because the POTS network is where all the other users are.  If switching my long distance provider meant that I could only talk to those other fools who switched, nobody would switch.  However, if all long distance providers could connect you to everyone else, and you could keep your phone number, then the barrier to get people to switch had been removed.  And, when this actually happened, the long distance providers quickly started to compete on price (as their service had neither differentiation nor stickiness), and their profits started spiraling downward.

SMS is an interesting aside worth mentioning.  SMS never gave any carrier the network effect advantage.  Even when SMS messages didn't cross from carrier to carrier.  This is because people choose their phone carrier for its utility as a phone.  Telephony is the "Killer App" for cellular.  SMS is a nice to have.  Perhaps a very nice to have.  Push To Talk(PTT) cellular is in a similar boat with SMS.  However, PTT is slightly different in an interesting way.  Public service workers (police, fire, EMS, utility workers) as well as other specialized industries have PTT walkie-talkies.  They may (and indeed many have) move from their walkie talkies to PTT cellular, because it gives them the "need to have" PTT walkie talkie, and adds in the "nice to have" telephone.