Lock-In For An Opt-In World
3.4
The power of network effects cannot be disputed. As platforms gather more value through external production, they attract more consumption, which in turn attracts even more production. Network effects guarantee repeatable interactions. Both producers and consumers repeatedly partic- ipate on a platform that has strong network effects. Network effects hold the keys to the long-term retention of producers and consumers, which increases the repeatability of the core interaction.
But today, the power of the network effect is fading. The network effect isn’t the one-stop solution for repeatable interactions that it once was.
sufficient network effect
Platforms with network effects often benefit from a winner-takes-all dynamic. The winner usually aggregates all producers and consumers onto one platform because of ever-strengthening network effects. This results in the creation of virtual monopolies. There is, however, a small caveat: the
consideration of multihoming costs.
In computer networking parlance, multihoming occurs when a computer or device is connected to more than one computer network. In the world of platforms, this notion is an important one. If producers and/or consumers can co-exist on multiple platforms, the platform faces a constant compet- itive threat. Eventually, it may be difficult for clear winners to emerge.
Multihoming can prevent the onset of winner-takes-all scenarios. The defensibility and competitive advantage of a platform business are very closely related to the multihoming costs that its producers and consumers incur. High multihoming costs result in the strengthening of network effects around a dominant platform, leading to a winner-takes-all outcome.
Multihoming costs are rapidly falling on today’s platforms. In the age of the fax machine, users paid through their upfront investment in hardware.
These upfront costs created lock-in, thereby creating barriers to entry for would-be competitors. Multihoming costs were high. In the age of the Internet, users no longer need to invest in physical hardware and upfront costs to join new networks. Multihoming is discouraged on online networks, allowing users to create their personal networks of connections. Switching between instant messaging services or between social networks is a non-trivial task. Users stick to Facebook or LinkedIn because they’ve invested in creating their personal network of connections. Multihoming costs are now associated with the creation of networks of people. However, these multihoming costs are not as strong as they used to be.
insufficient network effect
Two shifts have brought about a rapid decline in multihoming costs. First, the rise of the social graph allows users to port their personal networks between different platforms. A new platform, like Instagram, can leverage the single sign-on enabled by the social graph to build an alternate network of users rapidly. Second, mobile-based access allows users to switch easily and rapidly between different apps multiple times a day. This allows multi- homing at a scale that was once unimaginable. Drivers today use Uber, Lyft, and a host of other apps simultaneously and switch between them
several times a day. The convenience of the social graph, coupled with the ease of switching between platforms, has eroded the lock-in that once kept users bound to a network.
thinking beyond the network effect
The network effect isn’t quite as effective at retaining producers and consumers as it once was. Today, platforms need additional mechanisms to ensure that their best producers and consumers stick with them and continue to participate.
Platforms achieve this today by creating “cumulative value”: value that scales as the producer/consumer uses the platform more often. Traditional lock-in was often predatory and contrary to the user’s best interests.
Cumulative value ensures that value for the user accelerates with greater usage. Traditional lock-in was achieved through levying high upfront costs for the user, as with a two-year mobile phone contract. Cumulative value is achieved through small actions that the user is encouraged to take over time. Cumulative value leads to higher value with higher invested effort, which in turn encourages the user to invest even more. In the long run, the creation of cumulative value ensures that the producers and consumers remain loyal to the platform.
cumulative value
Platforms leverage cumulative value to encourage repeat participation by the best producers and consumers. Cumulative value doesn’t merely encourage repeatable interactions; it increases the repeatability of desir- able interactions. By design, it scales the participation of the best producers and consumers on the platform.Cumulative value takes four forms.
1. Reputation
Platforms like TaskRabbit may create greater stickiness for producers by allowing them to gather reputation. Reputation may take the form of explicit reputation, based on ratings and reviews, or implicit reputation, which
does not have an explicit manifestation but is leveraged by a platform’s algorithms to promote or demote a producer based on past actions. Repu- tation built on the platform contributes to better future opportunities and greater value for producers. To build reputation on a platform, producers must deliver highly rated goods and services consistently. Some platforms, like Airbnb, may have both sides explicitly rated. Some platforms may even create reputation based on editorial curation and vetting at the time of sign-up.
Reputation increases multihoming costs because it’s difficult for producers to build reputation on multiple platforms. If a platform succeeds in helping a producer build reputation through a set of initial engagements, it succeeds in creating repeat participation for that particular producer.
2. Influence
Influence is created through two mechanisms. First, platforms that utilize a one-sided follow model enable producers to gain influence by building a loyal and engaged following of consumers. YouTube channel subscribers and Twitter followers are measures of influence on the respective platforms.
In general, building a large, credible, and engaged following is possible only through repeated, engaged production on the platform. As the producer’s follower count grows, so does the cumulative value.
Influence may also be created through a second mechanism. Platforms like Wikipedia and StackOverflow give producers access to new rights on the platform as they participate more. The best producers acquire higher creation and moderation rights on these platforms. In both cases, the creation of influence increases multihoming costs because producers find it difficult to invest efforts toward influence creation on multiple platforms.
As a result, producers with greater influence tend to participate repeatedly on one platform.
3. Collections
A third source of cumulative value comes through allowing producers to create a collection. Photographers and designers use platforms like 500px and Dribbble to showcase their portfolios. Writers may use Medium to
showcase theirs someday. A larger collection creates increasingly higher feedback for a producer. The more content a producer creates in her collection, the more social feedback she receives over time. Higher social feedback also leads to greater reputation and influence. In general, producers who invest in creating collections tend to invest more in a platform where they see more activity around their collection.
4. Learning filters
Consumers may also benefit from cumulative value. Consumers find that a platform becomes more useful with usage. The Facebook newsfeed understands a consumer better over time and becomes more relevant.
These feeds are based on learning filters that constantly seek input from the user’s explicit and implicit actions and refine themselves. The more a user consumes information, the more intelligent the algorithm becomes in recommending pertinent content, thereby retaining the user over time.
platform scale imperative
The creation of cumulative value is one of the most effective ways for platforms to increase the repeatability of desirable interactions. It ensures that the best producers and consumers continue to participate and increase their participation over time. In tandem with other strategies mentioned in this section, every platform should carefully consider the most appro- priate implementation of cumulative value for its producers and consumers.