Thursday, November 5, 2009

Who was the first fax sent to?

I just got a Google Wave invitation. I was excited as a child on Christmas Eve: "OMG! Now I get to test it before everyone else!!"

How wrong I was. As soon as I logged in, I realized I didn't have anyone to "wave" to. My contact list was empty. Probably as of now just a bunch of Google engineers and their developer friends are using/testing Google Wave, so I guess I'll have to wait.

Which brings me to the law of the network effect: for each user, the value of a network is proportional to the square of the number of people in the network. In other words, a network of two persons is eight times less valuable than a network of four persons. There is a cute formula for this, but you can Google it.

This explains why products such as Facebook and Twitter focus much more in attracting users than in making money. The belief is that, after they have attracted enough users, the value of their network will be so astronomically high (as with everything with an exponential in the formula) that the path to monetization will necessarily somehow reveal itself.

The interesting (and somewhat puzzling) fact is however that many of those products have not managed to create sustainable business models yet. I have a theory for why this is so, but that's a subject for another post.

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