When Judging Antitrust Claims Against Google, Look At Lock-In, Not Network Effects

from the low-barriers-to-entry dept

Bill Snyder has an article calling Google "Microsoft's evil twin" because if it completes its merger with Yahoo it will have 90 percent of the advertising market and will be able to jack up the price of online ads. Snyder cites the concept of "network effects" and suggests that Google's market share advantage will "weaken of Microsoft's e-commerce infrastructure will further discourage competition and stifle innovation." This argument is confused. Almost every business enjoys "network effects." Wal-Mart, for example, is able to use its large base of customers to extract lower prices from suppliers, and is then able to use its lower prices to attract more customers. That's a network effect, but it's not a problem. What regulators have traditionally been worried about is not "network effects" in and of themselves, but network effects combined with technological lock-in.

In the Microsoft antitrust case, for example, the "network effects" argument was that various vendors had invested billions of dollars in research and development on technologies surrounding the Windows platform, and that these investments created an almost insurmountable barrier to entry for new operating system vendors: the creator of a new OS would have to persuade hundreds of companies to spend billions of dollars re-designing their products for a new platform. In contrast, the switching costs in the advertising market are extremely low. A small website owner selling inventory on one advertising network one week can easily switch to another the next. Larger sites might take a little longer but it's still not a large investment. Switching costs are even lower for advertisers, who can advertise on multiple networks simultaneously and shift their allocations on a daily basis.

There are a ton of small advertising networks focusing on niche advertising markets. Without the risk of barriers to entry due to lock-in, there just isn't much reason to worry about Google's large market share. If advertisers and website operators become frustrated with Google's advertising network, they can and will switch to another one. And Google, knowing how low the switching costs are, will still have plenty of incentive to treat its customers well.

Timothy Lee is an expert at the Insight Community. To get insight and analysis from Timothy Lee and other experts on challenges your company faces, click here.

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Building A Viral Business Isn't About Alchemy

from the an-insult-to-hard-work dept

Adam Penenberg is a fantastic tech journalist whose work I've admired for many years. However, I simply can't figure out what made him write a huge fluff piece in Fast Company magazine that makes a number of stunningly bad claims. Mostly, the article is a love note to Marc Andreessen's Ning social network in-a-box startup that has had its ups and downs but has been able to raise a lot of money. You get the feeling that Penenberg is trying to pick up on a "trend" that can be flipped into a trendy business book. In this case, the trend is: "viral expansion loop," which Penenberg makes out to be a secretive "magic sauce" known only in Silicon Valley that will turn your startup into a huge success with investors shoving each other aside to throw money at you.

This is wrong for so many reasons, it's hard to know where to start. Rafat Ali at PaidContent goes through the piece bit by bit to trash it, while Owen Thomas at Valleywag dissects what Pennenberg got wrong about Ning. But much more important is the overall message that Pennenberg's article sends: that all you need to know is this "secret formula" and you'll build yourself "a billion dollar business."

The thing is, there's no secret -- and so far, there's been no billion dollar business based on these concepts. "Viral expansion loops" may be a new term, but it's just a repackaging of "the network effect," which has been widely known and discussed for ages. There have already been multiple books on it, so, if Penenberg thinks this is a book, he's late to the game. But, personally, what's even more dangerous to unwitting entrepreneurs is this thought that if you can create a product where each user gets new people to join, you're an automatic success that will grow forever. Penenberg promises that using such a system "almost guarantees a self-replicating, borglike growth" and that "you can build a billion-dollar business from scratch." Yet, he gives no actual proof to support either statement.

Sure, there are companies that have grown virally -- but that's nothing new at all. And, if you look at the most successful "viral" growth stories, almost all of them kicked off with well-known, well-connected or well-funded founders. Thay've had a lot less to do with some "engineering alchemy" (as Penenberg claims) than with a group of folks who seeded the process and got it running. I've seen tons of "viral" apps out there that went nowhere. And it wasn't because they lacked that "engineering alchemy" or a "viral expansion loop." It was because building a business is difficult and takes a lot of effort, and not everyone succeeds at it. Penenberg's article is the worst kind of business fluff article: not only is it wrong, but it will get people to think that it's easy to do something that's actually very, very difficult.

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