The September 4, 2021 edition of the New York Times contains an article written by Professor Jonathan A. Knee entitled Network Effects are Overrated. The author generally dismisses as benign, or ineffectual just about anything platform intermediaries have undertaken, despite the prevailing view that these ventures impose significant costs and benefits on consumers and society.
Professor Knee appears to dismiss the ability of platform operators to lock in subscribers and create incentives for more consumers to “get on the bandwagon.” He also dismisses any sense that high market shares reflect a “winner take all” sweepstakes in play. Apparently, the ability to accrue scale efficiencies is not the same thing as exploiting network effects, the ability to expand the subscriber base at low incremental costs.
Professor Knee has great optimism in the ability of market entrants to capture market share and for consumers to vote with their eyes, ears, and pocketbooks and churn out of dominant platforms such as Netflix, Google, Facebook, EBay, PayPal, Uber and others.
The column curiously ignores one of the fundamental characteristics of platform intermediaries: the ability to profit from operating in a two-sided market serving both downstream consumers and upstream advertisers, data analytics firms, election meddlers, purveyors of disinformation, government surveillance agencies, and vendors.
Broadband platform intermediaries have unprecedented opportunities to get multiple bites of the apple as exemplified by Google’s ability to sell advertising, but also generate fees as the auctioneer of ad placements. Put another way, platform intermediaries can spread fixed costs and accrue positive network effects while also generating multiple profit centers up and down a complete market “food chain.”
Previous platform intermediaries had limited opportunities to exploit both sides of a market without jeopardizing profits. Fior example, cable television operators and newspaper owners had to calibrate both advertising and subscription rates to maximize profits. Attempts at gouging typically would reduce overall profits as consumers and advertisers pursued better value propositions.
Lastly, some readers of this blog may remember with fondness how Word Perfect software offered a better user experience than Microsoft Word. That notwithstanding, network effects over time forced people like me to get on the Word bandwagon, because sticking with Word Perfect guaranteed conversion and compatibility hassles.
Never underestimate the power of firms able to exploit network effects, economics of scale, and access to both sides of an integrated platform marketplace.
