Trends | 18-Aug-2017

Mobile Platforms and Network Effects

Network Effects

Networks are groups of people buying into a story, which is the essence of all branding and the purpose of all marketing. The prevalence of marketing across the internet is of little surprise.

Human progress relies on cooperation. Networks enable human cooperation, but require control mechanisms to enforce rules, without which they tend to entropy. Traditionally whoever controls these mechanisms become the rulers of the network and due to network effects, yield dominant power over the network. Network utility and network size are directly proportional while user value and network value are inversely proportional.

Network effects dominate our lives. They are all around us and propagate community. We exist and (sometimes) thrive as communities because of these network effects. Dunbar’s number sets at 150 the upper limit of stable relationships a human (brain) can maintain. Although humans have lived in much larger communities for some time, influence and therefore cooperation became more difficult as networks grew larger. While Dunbar’s number might still hold true in our day-to-day lives, the internet is extraordinary in that it creates connections between humans that transcend borders, languages, genders, and ethnicities, facilitating crossover between networks in larger numbers than ever considered fathomable.

It is these network effects that has fixated startups on displaying ‘hockey stick’ user growth. An exponential increase in users demonstrates early signs of a powerful network, the governors of which (the startup) assume authority over all users in the network – through which they yield control. It is for this reason that Facebook can sell the attention of its users to advertising networks and Google is willing to sell a part of their own service, effectively manipulating search results.

Progress is notable where overlaps occur. The internet is such a powerful tool because it facilitates the connection between networks, which drives cooperation and in turn speeds up the rate at which society advances. This process has been augmented by the smartphone and the networks it facilitates. We have seen stunning cooperation across networks of people that without a facilitation medium as powerful as the smartphone, would not have been possible. Decades old regimes have been toppled, entire governments torn down and ideological movements for positive (and in smaller doses, negative) change have gained momentum at an unheard speed. 

The social impact of the smartphone has been profound, however, the mobile ecosystem has subsumed the power of smaller networks. Decisions by Mark Zuckerberg yield more impact than any governing authority the world over. These changes aren’t trivial. The data matters, and if you want data, Facebook is the place to go. Currently, Facebook collects 98 data points on every user (2 billion MAUs) in the network. Those data points are the reason for their $26.9bn in ad sales in 2016, 84% of which were mobile. Google’s ad revenue – $75bn. 

This loops back to the early point made on network effects. The sheer scale of these networks (billions of MAUs) and their wealth enables innovation at unprecedented levels. Apple, Google, Amazon are the three most valuable companies on the planet, Facebook is eighth. The monopolisation of digital platforms has created the biggest network our planet has ever seen. By 2020, an estimated 5 billion adults will all be connected to the mobile grid, mostly through smartphones. This suggests that between them, Apple and Google will have a reach to more users than there were humans 30 years ago. Robin Dunbar would have been blown away! 

We are approaching the end of the mobile ecosystem, or more specifically, the smartphone ecosystem. There are clear, established winners – Samsung (hardware), Google (platform), Facebook (platform) and Apple (hardware, platform). There are also clear losers – Microsoft, RIM and three in four apps. The networks that operate further up the stack, mainly apps, have also been largely decided upon (or bought by Facebook). While statistics change depending on the source it is widely accepted that roughly 90% of mobile phone usage is spent in app. This is generally split between five apps, depending on the user, most of which are owned by Facebook or Google. If not, it’s Snapchat.

The Third Runtime

These platforms are now shifting the focus to a new opportunity, a third runtime. But to understand that, you need to understand how we got here.

The web browser represented a great opportunity for companies. It was neutral and fairly open. There were still issues around discovering the right content, as well as user trust, which were centred around privacy on a public domain. Google indexed the web which helped discovery and companies like Paypal created secure payment gateways to build trust while Adobe Flash (for all its notoriety) helped make the internet ‘fun’.

When Steve Jobs announced the iPhone, a second runtime was born along with the app store. It facilitated network overlapping at mass scale. An app (service/product) promised to reach right into the pockets of millions. Others followed suit with their own app marketplaces, but predominately Google and Microsoft. The reason Apple was so successful was not purely down to designing good products. Apple created an ecosystem of inoperable products and then created a network of developers who augmented the iOS experience. It enabled individuals and small development teams to leverage the capabilities of a powerful device and removed the usual barriers to the user (and in fact facilitated an introduction to the user via the App Store). The iOS platform is so powerful because of its ecosystem which facilitates overlap between a network of users and a network of services. 

Google and Android share a similar story, except that for Google their system needed to be interoperable across devices, which is why it open sourced Android.

The key, however, is that operating systems are not neutral. Apps have to play by their rules. It is why both Amazon and Facebook both attempted to disrupt the market with their own phones. Amazon failed with the Fire Phone but now run their own ‘Underground’ app store, while Facebook failed with both the phone and the subsequent Facebook UI. So instead they acquired a few of the most popular apps on both Android and iOS platforms. Apple, Google and Facebook win, along with the major apps of the platform (in the West, Snapchat, Pinterest, Spotify), because of network effects. Their networks are too powerful and their message to seductive (no barriers, user network etc.)

That brings us to the third, and undecided runtime opportunity. That runtime either surfaces at the base level operating system or further up the stack in an app. 

At an operating system level, Apple and Google are both making plays. Apple has ARKit (augmented reality) SiriKit (chat) and HomePod (chat and connected home). Google’s list of ventures is slightly more tiresome (probably because they’re more open to what they’re working on than Apple are) but include similar inroads to Apple by releasing Google Home (chat and connected home) Actions on Google (chat) and an array of AR/VR technologies.

Further up the stack, Facebook is creating their own platforms for VR, AR and chatbots – VR Spaces, AR Studio, camera effects (all mixed realities) and Messenger Bots. 

Amazon is aggressively targeting the smart home. Early success with Alexa is fuelling a wave of new chat enabled services, which Amazon call ‘skills’. On the consumer side, they are doing two things with Alexa. Firstly, working with third parties to integrate Alexa into more devices, from fridges to cars. Secondly, adding more components to their own Alexa devices, including cameras (think security, fashion analysis, product discovery/purchase) and screens (Kindle aside, Amazon don’t own any of the screens that you interact with their service on). This plays well into their own data strategies, which we won’t go into further here.

While a third runtime opportunity is not yet decided, whether this is a single technology or multiple technologies, what is clear is the reason for its existence. A promise to reach more users, on their native platforms. If that sounds familiar it’s because it is. TV promised a route into the home. The internet promised mass reach in the workplace and at home. Mobile apps promised anytime, anywhere reach directly into the hands of users. The message is seductive, promising fewer barriers to users, no install and scale. Discovery, however, remains the greatest issue, yet it is a problem that neither Facebook nor Google will be in any rush to fix. Both companies thrive off of the manifestation of it, advertising revenue. It is unlikely to give Jeff Bezos any sleepless nights, in his own words ‘Your margin is my opportunity’. Apple has more than $270bn in cash reserves, their ‘service’ business alone would be a Fortune 100 company. That service business is likely to grow along with their ecosystem of devices, fuelled by a notoriously loyal user base.

There is a proliferation of smart devices coming to market, creating a network of smart devices, known as the Internet of Things (IoT). The creation of these devices has been fuelled by components from the smartphone supply chain. We are, however, still at the ‘feature’ stage of IoT. We haven’t yet figured out what advantages these devices give us in our daily lives, and we are still a way off understanding the benefits (knowing what’s in my fridge is a feature, not a benefit). There are a few compounding reasons for this, but primarily it is due to the lack of an ecosystem to facilitate network overlap, which we call interoperability.

A third runtime is likely to solve this issue, because of the existing user base that GAFA have. It does, however, increase switching costs between ecosystems, creating user lock in.

The Opportunity

The Jeff Bezos quote, ‘your margin is my opportunity’ works both ways. The key to technology innovation is not in predicting what’s next, we tend not to be very good at that, probably because we lack the bandwidth to process enough of what’s going on across multiple industries, failing to grasp the multiplicity of technologies that have the potential to be plugged together, with diverse sets of components and services. Bezos’ opportunity drives him and his fellow giants into new technology frontiers, which in turn democratises new technologies. It drives resource into the technology and creates an overlap between a series of complex networks. Money networks (VCs, PEs, Angels) look for young disruptors to plough investment into, talent networks (companies, individuals) flock toward the excitement and money. Users become transfixed by the next ‘One last thing’.  

Users on the network and their coveted data are the essential building blocks to most emergent technologies however, it is the sheer scale of these tech giants which forces them to continue building new technologies, opening up opportunities and footholds for smaller networks. 

Their margin is your opportunity. 

Every day, we plug into the largest network of humans ever created. Until we operate in fully decentralised networks, if blockchain proponents ever have their way, there will always be tech giants. The way technology has proliferated our lives only supplements this. While the size, scope and strength of these giant’s networks are overwhelming, they pave a path forward for everyone. It is our unique ability as humans to cooperate in large networks, that allows us to build on the work our predecessors. To stand on the shoulders of others is what distinguishes us, to stand on the shoulders of giants is what enables us to reach new frontiers.