Network effects: You may swipe out if you like but can never leave

Tesla and SpaceX founder, and then the world’s richest man, Elon Musk had a terse tweet for his 48nn followers: “Use Signal”. Edward Snowden, the world’s most famous whistle-blower and privacy advocate clarified in a follow-up tweet: “That’s @signalapp, for those who don’t speak Elon.” Someone asked him why use Signal, and he had a simple, though chilling response: “I use it every day and I’m not dead yet.”. The implication being that if he used WhatsApp, people would have been able to trace him and his communication, through its owner, Facebook – a company admired and reviled in equal measure.

This entire kerfuffle started with an innocuous announcement about its new ‘privacy’ policy from WhatsApp in early January 2021. This new policy would let them share data on battery level information, browser records, IP address, details on network and the phone number to its sister network Facebook. While, significantly, this did not include the content of the chats themselves, all hell broke loose. Suddenly, every WhatsApp user one knew wanted to move away from it. Signal and Telegram emerged as the favoured destinations, with Signal, driven by Musk’s tweet, rocketing to the No. 1 position on the app stores. Interestingly, Signal is cofounded by Brian Acton, who founded WhatsApp and quit it in disgust, after Facebook started violating his principles for it. Even more interesting is the fact that the end-to-end encryption protocol he created for Signal is the same that is used by WhatsApp and Telegram, so content privacy is bullet-proof in all three.

WhatsApp groups resounded with calls to their administrators to move them to these new precincts. Killing your WhatsApp account became a noble calling, as droves of people opened Signal and Telegram accounts. Until they did not. A few weeks on amid extensive damage control announcements from WhatsApp, people started sneaking back there. While every feature that people wanted was there, their friends were not, and there was no one to talk to. As a tweet from a frustrated user complained: “There was only privacy in Signal, no network.”  This begs the question as to why platforms like WhatsApp or Facebook become so sticky and addictive. What is it in them, that makes them so difficult to leave?

The answer lies in what platform pundits call network effects. Defined as the concept where each new user on the network increases the value of the service for all others, it is a notoriously difficult state to achieve. More users drive more producers or value creators, and more producers, in turn, drive more and more users or value realisers, generating value across the entire network. Much like Moore’s law drives computing, the law that drives the network effects of social networks is Metcalfe’s law. Moore’s law is linear, with computing power approximately doubling every eighteen months. Metcalfe’s law is exponential, with the value of the network increasing to the square of the number of people in the network. Network growth and value, however, becomes hyper-exponential when the users of the network start interacting with one another (think WhatsApp Groups), with what is called Reed’s law.

Network effects are driven by four principles: Switching costs, economies of scale, brand habit and proprietary tech. Switching costs are the cost or friction to move from one network to another – think of creating the same group of friends in Signal, as were there in WhatsApp. If the switching costs are high, people do not move. Thus, new networks try their level best to reduce or eliminate switching costs. Economies of scale drive cost and allow a leader like WhatsApp to just outspend its competitors, denying them scale. Brand habit, as the name suggests, is the fact that people get used to the brand, the looks and the user experience of the large network and find it difficult to adjust to the new one, thus driving them back. Finally, most big networks develop proprietary algorithms (say, the recommendation algorithms of Amazon), which cannot be replicated by the newbie. Associated with network effects, is the concept of critical mass: in our context, a certain number of users after which the network becomes self-generating. A certain minimum number of users are needed for more users to come in, and the earlier users to stay. With its 2bn active users, WhatsApp mass smothers the 15mn odd of Signal, and does not allow the latter to reach there.

So, is there no hope for a new social network? To get the answer, all we need to do is to hark back to MySpace, or AOL, or even BBM – social networks do not last forever. Even today, by certain measures, Facebook is starting its decline. Web 3.0 networks with explicit data sharing and incentivizing the creators are making their first tentative steps. Until then, however, trying to exit these colossal networks is a bit like departing Hotel California: “You can check out any time you like, but you can never leave…”

(This article was published as a Mint column on Mar 4, 2021)


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