The Rise Of The Network Company

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The Rise Of The Network Company

  1. 1. THE NEW ERA OFTHE NETWORK SERVICE Sean Parker Web 2.0 Summit October 22, 2009
  2. 2. THE NEW ERA OF THE NETWORK SERVICE Why companies like Facebook, Twitter, Ebay and Apple (but not Google) will determine the future of the internetWeb 2.0 Summit, 2009 - The New Era of the Network Service 2
  3. 3. COMPANIES THAT HARNESS THE POWER OF NETWORKS WILL DOMINATE THE INTERNET COLLECTING DATA IS LESS VALUABLE THAN CONNECTING PEOPLEWeb 2.0 Summit, 2009 - The New Era of the Network Service 3
  4. 4. WHAT ARE NETWORK EFFECTS? “When the value of a product to one user depends on how many other users there are.” - Shapiro, VarianWeb 2.0 Summit, 2009 - The New Era of the Network Service 4
  5. 5. THE POWER OF NETWORKS • Option Value • Expected value of potential connections between nodes • Action Network Value • Real value of active connections between nodes • Switching Cost • Cost of switching networks for any single user or group of usersWeb 2.0 Summit, 2009 - The New Era of the Network Service 5
  6. 6. THE POWER OF NETWORKS • Network effects produce winner-take-all markets • The big get biggerWeb 2.0 Summit, 2009 - The New Era of the Network Service 6
  7. 7. METCALFE’S LAW value increases with n 2Web 2.0 Summit, 2009 - The New Era of the Network Service 7
  8. 8. METCALFE’S LAW Potential Value of Network increases with n 2 Size of Network (n)Web 2.0 Summit, 2009 - The New Era of the Network Service 8
  9. 9. WHAT IS A NETWORK COMPANY? Basic unit of value for a network company is not the data it stores, it’s the number of connections it facilitates Communication Marketplaces Networks Games Platforms eBay Facebook World of Warcraft Apple iPhone Craigslist Twitter Zynga Facebook Skype Foursquare LinkedInWeb 2.0 Summit, 2009 - The New Era of the Network Service 9
  10. 10. INFORMATIONS SERVICES VS. NETWORK SERVICES • Information Services • Google, Yahoo!, CNET, YouTube, MSN • Core value is collecting and processing data • Network Services • Facebook, Twitter, Ebay, PayPal • Core value is facilitating a relationship between people or groupsWeb 2.0 Summit, 2009 - The New Era of the Network Service 10
  11. 11. • Craigslist • MySpace • AIM • Ebay THE BEST PRODUCT DOESN’T ALWAYS WINWeb 2.0 Summit, 2009 - The New Era of the Network Service 11
  12. 12. A NATURAL MONOPOLY: EBAY Registered Users (MM) 3 2 Onsale ebay 1 Q1 1998 Q2 1998 Q3 1998 Q4 1998Source: Company FilingsWeb 2.0 Summit, 2009 - The New Era of the Network Service 12
  13. 13. A NATURAL MONOPOLY: EBAY Registered Users (MM) 300 225 150 ebay 75 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009Source: Company FilingsWeb 2.0 Summit, 2009 - The New Era of the Network Service 13
  14. 14. “A MONKEY COULD RUN THIS BUSINESS”Web 2.0 Summit, 2009 - The New Era of the Network Service 14
  15. 15. WHY DID EBAY BUY SKYPE? Purchase Price in 2005: $2.6B • 75mm Registered • $70mm Revenue Purchase Price 2009: ? • 521mm Registered • $740mm Annualized RevenueSource: Company FilingsWeb 2.0 Summit, 2009 - The New Era of the Network Service 15
  16. 16. THE FALL OF FRIENDSTER • Social networks are communication services, they obey the laws of networks • Friendster was not a fad • The company failed due to difficulties scaling the infrastructureWeb 2.0 Summit, 2009 - The New Era of the Network Service 16
  17. 17. THE FALL OF FRIENDSTER Search Index Volume 10 friendster myspace hi5 8 5 3Source: Google Trends 2004Web 2.0 Summit, 2009 - The New Era of the Network Service 17
  18. 18. FACEBOOK VS. MYSPACE Unique Visitors (MM) 150 Facebook Myspace 113 75 38 9/07 11/07 1/08 3/08 5/08 7/08 9/08 11/08 1/09 3/09 5/09 7/09 9/09Source: comScore Media MetrixWeb 2.0 Summit, 2009 - The New Era of the Network Service 18
  19. 19. HOW THE HELL DID MYSPACE LET THIS HAPPEN? 2005 • Facebook: 8mm users • MySpace: 60-100mm users • Systematic product failure • Technical limitations • Facebook had a secure beachhead in college marketWeb 2.0 Summit, 2009 - The New Era of the Network Service 19
  20. 20. CAMPUS WARFARE Win 1 Win 2 Facebook Schools Berkeley Enemy Schools Tactical Schools Columbia Baylor Southwestern Cornell Columbia Texas A&M Dartmouth Stanford UTA Harvard Stanford Columbia Baylor Yale Win 1 Stanford Win 2Web 2.0 Summit, 2009 - The New Era of the Network Service 20
  21. 21. BATTLE FOR GERMANY Unique Visitors (MM) 20,000 15,000 StudiVZ Sites 10,000 Facebook 5,000 0 7/1/08 9/1/08 11/1/08 1/1/09 3/1/09 5/1/09 7/1/09 9/1/09Source: comScore Media MetrixWeb 2.0 Summit, 2009 - The New Era of the Network Service 21
  22. 22. BATTLE FOR GERMANY Search Index Volume StudiVZ Sites Facebook 2004 2005 2006 2007 2008Source: Google TrendsWeb 2.0 Summit, 2009 - The New Era of the Network Service 22
  23. 23. DATA PORTABILITY IS A RED HERRING • Value of connections is super-linear, value of datasets is linear at best • Moving data is hard, moving people is harder • Example: ebay’s auction database • Data portability is easily solved by converters and adapters.Web 2.0 Summit, 2009 - The New Era of the Network Service 23
  24. 24. GOOGLE DOESN’T OWN NETWORKS NETWORK INFORMATION SERVICES SERVICES • AdSense • AdWords • Dodgeball(?) • Gmail • Orkut • Search • Google Talk(?), Wave(?) • Maps, etc.Web 2.0 Summit, 2009 - The New Era of the Network Service 24
  25. 25. CLOSING THOUGHTS 1. Over the next decade the aggregate value of the emerging class of network companies will dominate the internet 2. NEW economic value on the internet will not be generated by search 3. Google will continue to be an economic powerhouse but its relative importance on the internet will declineWeb 2.0 Summit, 2009 - The New Era of the Network Service 25

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