The Rise Of The Network Company

Sean ParkerWeb 2.0 SummitOctober 22, 2009

THE NEW ERA OF

THE NETWORK SERVICE

Web 2.0 Summit, 2009 - The New Era of the Network Service 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 internet

Web 2.0 Summit, 2009 - The New Era of the Network Service

COMPANIES THAT HARNESS THE POWER OF NETWORKS

WILL DOMINATE THE INTERNET

COLLECTING DATA IS LESS VALUABLE THAN CONNECTING

PEOPLE

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“When the value of a product to one user depends on how many

other users there are.”

WHAT ARE NETWORK EFFECTS?

- Shapiro, Varian

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• 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 users

THE POWER OF NETWORKS

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• Network effects produce winner-take-all markets

• The big get bigger

THE POWER OF NETWORKS

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METCALFE’S LAW

valueincreaseswith n2

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METCALFE’S LAW

Size of Network (n)

Potential Value of Networkincreases with n2

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Basic unit of value for a network company is not the data it stores, it’s the number of connections it facilitates

WHAT IS A NETWORK COMPANY?

MarketplaceseBay

Craigslist

CommunicationNetworksFacebook

TwitterSkype

LinkedIn

GamesWorld of Warcraft

ZyngaFoursquare

PlatformsApple iPhone

Facebook

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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 groups

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• Craigslist• MySpace• AIM• Ebay

THE BEST PRODUCT DOESN’T ALWAYS WIN

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1

2

3

1

2

3

Q1 1998 Q2 1998 Q3 1998 Q4 1998

A NATURAL MONOPOLY: EBAY

Source: Company Filings

Registered Users (MM)

Onsaleebay

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0

75

150

225

300

0

75

150

225

300

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Registered Users (MM)

ebay

A NATURAL MONOPOLY: EBAY

13Source: Company Filings


“A MONKEY COULD RUN THIS BUSINESS”

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WHY DID EBAY BUY SKYPE?

Purchase Price in 2005: $2.6B• 75mm Registered• $70mm Revenue

Purchase Price 2009: ?• 521mm Registered• $740mm Annualized

Revenue

15Source: Company Filings


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 infrastructure

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3

5

8

10 friendster myspace hi5

THE FALL OF FRIENDSTER

Source: Google Trends

Search Index Volume

200417


38

75

113

150

38

75

113

150

9/07 11/07 1/08 3/08 5/08 7/08 9/08 11/08 1/09 3/09 5/09 7/09 9/09

FacebookMyspace

FACEBOOK VS. MYSPACE

Source: comScore Media Metrix

Unique Visitors (MM)

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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 market19


Win 1

Win 2Win 2

CAMPUS WARFARE

Facebook SchoolsBerkeleyColumbiaCornellDartmouthHarvardStanfordYale

Enemy SchoolsBaylorColumbiaStanford

ColumbiaStanford

Tactical SchoolsSouthwesternTexas A&MUTA

Win 1 BaylorWin 2

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0

5,000

10,000

15,000

20,000

0

5,000

10,000

15,000

20,000

7/1/08 9/1/08 11/1/08 1/1/09 3/1/09 5/1/09 7/1/09 9/1/09

StudiVZ SitesFacebook

BATTLE FOR GERMANY

Source: comScore Media Metrix

Unique Visitors (MM)

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BATTLE FOR GERMANY

Source: Google Trends

2004 2005 2006 2007 2008

StudiVZ SitesFacebook

Search Index Volume

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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.


converters and adapters.

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• AdSense

• Dodgeball(?)

• Orkut

• Google Talk(?), Wave(?)

NETWORKSERVICES

GOOGLE DOESN’T OWN NETWORKS

• AdWords

• Gmail

• Search

• Maps, etc.

INFORMATIONSERVICES

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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 decline

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The Rise Of The Network Company

Business

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