WhatsApp and the Erosion of the Network Effect

Everyone is already on the telephone network.
Facebook's Mark Zuckerberg during his company's IPO. (Reuters)

Facebook's $19 billion acquisition of WhatsApp isn't just a milestone for the current generation of mobile apps. It also shows how, in the mobile world, some of the key assumptions about the way communications networks function may need revising.

Take the network effect. The simplified version says that a communication network gets more valuable as more people join it. Just so we're using the canonical understanding, here's Wikipedia:

The classic example is the telephone. The more people who own telephones, the more valuable the telephone is to each owner. This creates a positive externality because a user may purchase a telephone without intending to create value for other users, but does so in any case. Online social networks work in the same way, with sites like Twitter, Facebook, and Google+ becoming more useful as more users join.

Lock-in was common: you use Microsoft Word because everyone else uses Microsoft Word. You use Facebook because everyone else uses Facebook. Et cetera. 

The switching costs between full-blown social networks on the web is high. Sure, all your stuff is on the network, but more importantly, you'd have to recreate your network. Not just the set of friends, but the actual usage. So, switching required a lot of members on the network to make the same decision. 

With a phone, your network of contacts goes with you to any app you want, instantly, and the push notifications allow friends on any of the apps you've installed to contact you at any moment. Friend uses SMS? No problem. Friend uses WhatsApp? No problem. Friend's on Facebook? No problem? Friend's on Twitter? No problem. Friend's on Snapchat? No problem.

One doesn't have to use all these apps so much as to be available on them. Communication can then occur fluidly between them. All of these applications provide me the precise same service of message delivery in precisely the same way, as an alert on my phone. The phone easily coordinates handles a network of networks. 

Andreesen Horowitz's Ben Evans has been brilliant on the dynamics of competition in the "social mobile" space




Under these conditions, it's not that the network effect goes away, but its influence wanes. Facebook has 945 million mobile users. That's one hell of a network. And yet they just spent $19 billion on WhatsApp hundreds of millions of users.

Another way to think about it: everyone is already on the network—that's what a phone number is, a network ID—and so the reward for connecting people isn't very great. Many messaging apps can thrive because they are mere front-ends to the underlying network of phones. Other factors like user experience, photo features, ephemerality, or pseudonymity determine usage. And apparently, many people have intuitive specifications that allow them to discriminate between these superficially similar offerings. 

That's not a text, it's a snap... Don't Facebook message that... DM me.

Under these conditions, Facebook's strategy seems properly opportunistic. They could care less about what app you use, as long as they can use your words to bucket you for marketers and your metadata to understand your social graph. 

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Presented by

Alexis C. Madrigal





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