On network affects and antitrust

A common argument for why current social network companies are monopolies is that it would be hard for a competitor to get in. Network effects often come up as a major reason for the situation. Network effects are defined as a situation when social network (or any other product) is more valuable when more people are using it. It makes it hard to switch to a new social network because nobody of your friends are there.

The sceptical people are quick to dismiss this argument pointing to examples such as MySpace as a counter, saying: Well, where is MySpace and it’s networks effects now?

This counter argument is wrong on two counts.

First, the success or failure of a company is not a single component formula. It might well be that networks effects were helping MySpace immensely and just the terrible management made it fail.

Secondly, and much more importantly, the whole premise of the argument is wrong. Network effects should be calculated relative to the whole potential market. MySpace at it’s peak had a minuscule percentage of the whole market, so it never really nad monopolistic network effects. Majority of the market have not been using any social network. How much of Facebook initial users where first time social network users, and how much where MySpace converts?

The current Facebook is a different story though. It has majority of the market, and meets my definition of network effects. This is definitely helping Facebook maintain it’s position. While it does not preclude a competitor from winning, it just makes it so much harder.