A new paper by IDE Research Fellow Michael Schrage offers divergent insights into platform markets and network effects. In the paper, Rethinking Networks: Exploring Strategies for Making Users More Valuable, Schrage postulates that understanding the impact and influence of network effects is essential to understanding value creation in digital markets worldwide. He says that network effects make platform companies successful and they increasingly determine innovation opportunity, value creation and growth in a digital economy. Without them, platforms are instruments without music, he says.
IDE Community Manager and Contributor, Paula Klein, asked Schrage to respond to three key questions about the research; his answers follow. The full research brief can be viewed here.
How does this new research on Network Effects differ from previous discussions, especially of platform economics
A: It differs dramatically. My argument is that the real economic value and business impact comes not from ‘the platform’ but from the ‘network effects’ that platforms enable. In other words, platforms are a means to an end and businesses should pay particular attention to the desired ends they seek. To make an analogy: Network effects are the music and platforms are the instruments. The instruments are very, very important, of course, but do we really want to confine our musical creativity and innovation to a piano or guitar or synthesizer? Instead, I think you want to begin by asking “What kind of music do we want to compose for what audiences?” And then ask, “What kind of musicians do we want to be?” Once the goals are established, then we can argue about what instruments (or platforms) to play or build and what recording studios to hire. Instruments are means to a musical end. Fine-tuning an instrument may improve its sound but it doesn’t necessarily improve the music. Platforms also must be tuned to the aims of the network effect.
What is the key takeaway — both internally and with customers– for businesses in traditional industries such as finance, retail or manufacturing?
A: The key takeaway is: Making customers better, makes better customers. I’m considering how and whether business can use digital media to make customers more valued to the business and more valuable in customer’s own eyes, as well. How can – and should – businesses segment users and facilitate how they share information and insights with each other? I’m also looking at how businesses can give users new capabilities and skills that collectively create a virtuous cycle of value creation. The Triple-S framework I discuss in the research – Segment, Socialize, and Skill-ify– has had enormous impact in helping traditional marketing and innovation people create and capture the benefits of network effects. But investing in one’s users is key.
What are the economic implications of network effects-driven business models?
A: To me, the clear top-management concern has to be how boards-of-directors and executive committees effectively oversee network effects as an enterprise-organizing principle and asset. If you’re an Amazon, Facebook, Github or Apple or – now, Haier – network effects-management is as important as risk or R&D management. Network effects, arguably, is the most cost-effective way to facilitate value-creation. As my research colleague and collaborator Marshall van Alstyne has observed, network effect are about “customers creating value for other customers.” How is that not vital and central to brand, user-experience and sustainable economic success? My bet is that we’ll see a CNEO – a Chief Network Effects Officer – at a multibillion dollar company before the end of 2018.
Michael Schrage is a fellow with the MIT Sloan School’s IDE and a visiting scholar at Imperial College’s Innovation and Entrepreneurship program. He is author, most recently of the Innovator’s Hypothesis, (MIT Press 2014). An angel investor in several digital media and machine learning start-ups, he is a featured blogger on the Harvard Business Review site. His work has been published the Sloan Management Review, the Financial Times, The Wall Street Journal, the Nikkei Asian Review, and the CACM. An angel investor in several digital media and machine learning start-ups, he is a featured blogger on the Harvard Business Review site. His work has been published the Sloan Management Review, the Financial Times, The Wall Street Journal, the Nikkei Asian Review and the CACM.