Two years ago, when I wrote “Special Network Vehicle: Creation Spaces-Based Network Effects” and sent it to James Currier to thank him for being a source of inspiration, I was expecting no more than a digital clap. Generously, he replied with the following;
The tweet felt too good, and it leveraged my passion for finding and pushing the boundaries in the network effect’s domain. However, no one warned me that James and his colleagues at NFX already pushed all the visible boundaries. James almost covered everything you might want to know about network effects (the past, present, and future). You can see by yourself;
The Network Effects Bible
The Network Effects Manual
The NFX Archives
After that, I kept looking for a single un-pushed boundary with no luck, until I met Ben Thompson (virtually via Stratechery). Thanks to Ben (one of my latest superheroes ‘Venom’), I started to solidify my understanding of the network effects from a value chain perspective.
It was an enlightening moment when Ben explained how platforms integrate other network effects into their value chains. For example, Google was not buying the superiority of YouTube’s value proposition. Google was integrating and internalizing YouTube’s network effects. Check the below links, but I must warn you Ben’s thinking will capture your brain.
The Value Chain Constraint (from the weekly update — free version)
Exponent Podcast: Valuing Value Chain
Still, something was missing. The un-pushed boundary that I found was not complete until I came across a new magical treasure: a masterpiece called Unlocking the Customer Value Chain by Prof. Thales Teixeira (the latest superhero ‘Dr. Strange’). Do yourself a favor, and buy this book.
Now that we introduced the two most recent superheroes, let’s jump into the core of this post.
I do believe that it is time to dive deep into the network effects, to reach the core: understand the network effects as value creation chains and not merely a strategic moat or defensibility mass destruction effect.
I must start by thanking Sangeet Paul Choudary. His recent few tweets helped me to replace almost 500 words with the below two tweets, which will place you at the heart of this post. Thank you, Sangeet.
Following the above tweets, I would like to introduce a new term: “Network Chain.” Let us unpack the thinking behind it.
Thanks to Michael Porter’s Value Chain framework, we know that to run a profitable and scalable business, you must build a robust value chain. A tightly integrated value chain can repeatedly generate the desired value proposition. For example, Twitter’s value chain is continuously allowing us to know what is happening in the world and offers a glimpse into what people are currently thinking.
But if you notice, it seems that Sangeet is referring to the existence of another mysterious value creation mechanism on top of the supply chain: a value creation mechanism in the core of the network effects. You can call it the invisible chain for now, but by the end of this post, you might prefer to call it the Network Chain.
So why it is invisible? One apparent reason can be traced to the overly simplistic definition derived from the industrial age: a definition that hasn’t evolved (at least from a business viewpoint) during the transition to the post-industrial age.
Ironically, the true potentials of the network effects are compressed by its generic definition. The network effect is not a phenomenon. It is a living thing, our collective behavior (i.e., Hosts, Guests, Tweeters, Readers, Drivers, Riders, Video Creators, Viewers, etc.). The intersections of such collective behavior are unimaginably rich. But it is not reflected in the definition, so we must do something.
As an example (thanks to Twitter), I gained from following John Hagel, a spectrum of high-quality values. None of them is part of Twitter’s core value proposition.
New Thinking — Twitter’s network chain reduced the thinking gap between the most influential business thinkers (who we admire and follow) and us, by getting exposed to instant and continuous flows of knowledge.
Humbleness — observing how John interacts with us (his followers), nurtured a sense of humbleness and generosity (i.e., being humble in my quest towards seeking new knowledge and generous with my time with others.
To systematically excavate such invisible values that get produced on top of the value chain, we need to bring justice to the network effect by gravely understanding its network chain.
The term Network Chain might get misunderstood if it is taken out of context. Accordingly, it will be advantageous if we unify our understanding of the context (i.e., unifying our understanding of what is a platform).
A Platform is an “economic architecture” that governs the:
Aggregation and match-making of the right supply and demand (i.e., governing interaction enablement)
Gravitation and mobilization of the right resources (i.e., governing interaction enrichment)
Creation, curation, and consumption of the right values (i.e., governing interaction facilitation)
Assignment and enforcement of the right authority and responsibility (i.e., governing the rules of engagement)
The above definition was greatly inspired by a term coined by Sangeet: “enabling interactions.” This is how I understood it:
Using a step-by-step approach, let us use Instagram as an example to explore the above.
First, let’s condense the platform’s definition into the Instagram app.
The first lesson in building a platform-based business model is to understand this point: An app without the right business model and value chain is nothing but a digital ghost house on Apple’s App Store or Google’s Play store. To bring life into the above adorable app, you need to install the engine: a value chain that is capable to efficiently produce the desired value propositions (posting and viewing filtered pictures).
As you can see, the value chain concerns addressing a job to be done. For example, as a producer of value, WHAT do you want from Instagram? To allow you to upload your filtered pictures. Accordingly, Instagram built its value chain to enable this job to be done.
Now, imagine that we are in the year 2012 and someone told you that this company is for sale with a USD 50,000,000 valuation. Do you think any investment bank will be interested in such an offer? You are correct. No. That cost for such a company with such a value chain will never reach investment banks’ boardrooms. So, how can you justify Facebook paying USD 1,000,000,000 to acquire it? It’s easy. Facebook was acquiring Instagram’s network chain, to integrate it with its network and value chains.
When both chains intertwine, your wish will become a command. The value chain repeatably allows you to achieve WHAT you want (posting your best self), and the network chain will take care of WHY you want to post your best self. Value chains are constrained by the gravity of economics, whereas the network chain gravitates to participants’ behaviors.
Accelerated growth can result from a network effect, but the prolonged exponential growth is a derivative of the integration between the network chain and value chain.
Such integration cannot take place in a vacuum. The network chain must feed (e.g., data) the value chain and the value chain must support (e.g., features) the network chain. The value chain must continually learn from the network chain.
Value can be amplified when both the network chain and the value chain achieve a high level of integration with the end-users (both the producers of value and consumers of value).
If you are running a platform business or you are in the process of doing so, you must:
1- Tightly integrate your network chain with your value chain, and
2- Tightly integrate your chains with your end-users, in a balanced way.
The above illustration is politely whispering to you — prophesying the end of commoditizing the supply-side and controlling the demand-side.
Almost every enthusiastic wannabe entrepreneur with a platform idea is hovering around such an innocent, opportunistic view: extract data, mesmerize attentions, commoditize supply, and control demand. Become the next Zuckerberg.
To those, I sincerely want to say that the party is over. If you believe that data and attention are the new currency, then you need to accept the fact that Google, Facebook, Amazon, Apple, Alibaba, etc. are the new Federal Reserves and Central Banks. They control the attention reserve requirement ratio and data interest rates.
A lot of people missed the real estate boom, the bull market that followed the financial crisis, and the Bitcoin madness. I am sorry to tell you that you just missed the easy exponential growth that yielded from such platform-based businesses. The future of platform-based businesses will be based on righteousness. The righteousness that I am talking about derives from a state of economic equilibrium. Savvy users on both sides (supply and demand), along with more stringent rules and regulations, will underpin any future growth. Each party will pay (monetary value, attention, tokens, services, etc.) in proportion to the value that they are getting.
This means building your platform-based business on progressive fundamentals. Your value propositions and your growth ideology must evolve along with your network chain.
Thanks to the above superheroes, I managed to translate the above dimensions into a workable tool called “Network Chain.” This tool consists of two main parts: “know your network chain” and “network chain due-diligence.” The first part (the center) is to stress-test your network chain, and the second part (the sides) is to back-test and simulate the integration between the network chain and the value chains.
The core objective of the network chain is to understand your network effects and to capitalize on the richness of your network effect to prolong your exponential growth. Whenever you want to add value to your participants, avoid the below path on the left.
Such sequential movement is wrong — fundamentally, technically, conceptually, and behaviorally. You cannot add an icon on your app, thinking that you will own people’s attention and capitalize it within the network effect. Such an approach worked a decade ago, but not anymore. The way to strengthen your network effect (look at the right side above) is to enhance the level of integrations between the network chain and the value chain. Accordingly, you should move inwardly from multiple directions.
Now let us bring the network chain concept with the evolution of value proposition and growth ideology. In Infinity Jobs, I introduced the value proposition canvas, advocating that value propositions must evolve with time. In Platfornomous, I introduced the longevity growth concept, promoting that your growth framework must expand in a balanced way (i.e., a platform must give balanced attention to the ecosystem, producers of value, and consumers of value). Both tools evolve within three layers, and in parallel, the network chain must evolve with them.
So, let us experience how we integrate the network chain with the value chain and the end-users within each layer.
Everyone knows that Twitter is facing an issue with its active monthly users. Apparently, Twitter’s network effect reached the maturity stage (showing symptoms of decline stage). The network chain way of thinking taught us that when we have an issue with our network effect, we must fix it by looking inwardly.
Example One: Twitter — Minor Change.
Twitter can focus on “Nodes & Links.” Almost all social media has central and marginal nodes with varying degrees of strength in the linkage. So, how can Twitter help its marginal nodes to gain some weight? What if Twitter introduces a trophy badge? It would be like the endorsement feature on LinkedIn, but smarter.