The Secret Sauce of Web 2.0: Network Effects

Original Link: Web 2.0’s Real Secret Sauce: Network Effects

Original Author: Dion Hinchcliffe

I once wrote an article about the **reductionism of Web 2.0**, which helped people understand the basic principles of Web 2.0 and assisted in understanding why we need to change our roles in this game. The Web is currently evolving rapidly, and it's changing its original appearance due to user participation. If you're unsure about this already established fact, just look at MySpace, the most classic example. Upon closer inspection, you'll find that MySpace is a complete Web 2.0 player. They have achieved the world's highest traffic (just last week) by leveraging user-generated content through network effects, all within less than two years since their inception. This achievement has left a deep impression on people, showcasing the immense power of the Web 2.0 model, which can even allow you to surpass existing powerful players like Google and Yahoo! in a short period of time. This phenomenon fully demonstrates that successful applications labeled as "Web 2.0" have the ability to break existing rules. People are starting to take this seriously.

### How to Trigger Network Effects (Diagram)

The entities that trigger network effects; your network should consist of the following types of content:

- **Content** (blogs / wikis)

- **People** (social networks), producers of content

- **Activity groups** (e.g., Katrinalist), used to establish relationships between people and content

### Mechanisms for Triggering Network Effects

- **Seamless participation**: Users can easily contribute content.

- **Effective connectivity of content**: Content can be effectively connected.

- **Unique data sources contributed by users**: Data provided by users must be unique.

- **Small chunks of data**: Data can be freely combined and recognized by systems, such as Microformats.

- **Applications as platforms**: Treat your application as a platform.

- **Synchronized output of content** (RSS): Content can be synchronized and output.

- **Establish feedback loops**: Build cyclical feedback mechanisms.

### Value of Triggering Network Effects

- **Building and growing communities**

- **Encouraging users**

- **Fostering/harvesting innovation**

- **Attracting attention** (e.g., advertising)

If actions align with thoughts, then this split can quickly, and even rampantly, spread within existing business and social structures! Therefore, many people are very interested in this and frequently discuss Web 2.0-related technological advantages online and within their organizations. This further explains why venture capitalists, entrepreneurs, and companies are rushing into this game before traditional industry leaders enter. To put it in my own words, this year is just the beginning; industries that fail to effectively leverage Web network effects will face a very difficult period ahead.

Making everyone achieve this is actually somewhat impractical and ironic. Web 2.0 is a truly egalitarian force, although some core competence (something that allows you to sustain growth) is required, but anyone with innovative ideas and excellent technology can knock on the door of an audience of one billion.

Triggering network effects: Is it as simple as establishing an effective viral feedback loop? Surprisingly, yes, it is.

The vast web of the Internet is gradually entwining our lives. Most media forms now exist on the Web, such as newspapers, TV, radio, entertainment, music, art, etc. And daily life elements, such as email, instant messaging (IM), calendars, travel planning, time/task management, and more, are also all moving to the Web. A large portion of us have developed the habit of spending significant amounts of time on the Web. Through the simple allure of hyperlinks, we can be redirected to any website offering new Web 2.0 experiences. So, if someone likes your new site, they will send the link to their friends, who will then send it to their friends' friends, and so on. A simple link recommendation can attract hundreds or even thousands of users. A good viral feedback mechanism retains users, making them come back, and brings their friends along as well.

Of course, in the coming years, patterns that trigger network effects like those seen in MySpace, Facebook, and similar social networks will become more common. As a result, the existing fragmentation within the industry may reach equilibrium because everyone moves toward the same model. However, the secret to achieving balance with Web 2.0 technologies now lies in how effectively you can leverage network effects to grow your network. This remains an art (please read one of my previous articles: *How to Achieve Excellent Social Software*). The bottom line is: the potential benefits and drawbacks of Web 2.0 are truly meaningful, meaning you cannot afford to remain indifferent in this industry.

We've been talking about network effects for a few minutes now, so what exactly are they? I once wrote an article on this topic where the core description of network effects was: when something or a service generates more value as more users use it—simple, right! Like email, IM, blog links, or even the Web itself. However, one unclear aspect of this description is how to measure the value generated by network effects. There are now many rigorous studies and mathematical formulas that reveal the exponential growth caused by network effects. For instance, Robert Metcalfe's original **Metcalfe's Law** described the network effects of computer networks. Recently, some formulas have attempted to calculate the value generated by network effects more precisely. One notable formula comes from David Reed [...]