What is a network externality? It is the value-added to the site from having more consumers. Facebook, Twitter, YouTube all host user-generated content, so more users means more content, and more importantly, more users means a broader audience. When we post statuses like "OMG, suuuuuper plastered yesterday lololol, btw. still looking for my sweater and pants" we are effectively communicating with the people we know, and expect the friends we have on the site to give us some kind of response. In this way, the very fact that Facebook, Twitter and YouTube have a larger user-base is a huge advantage, because each user adds to the value of these sites with their content, and a large user-base means people will want to post on these sites because more of their friends can read what they want to communicate.
What does network externality imply about the competition between different sites? During the initial phase, when none of the sites that are trying to compete to be the social networking site, or the micro-blogging site, or the video-sharing site have a large following, a lot is up to chance which site takes off the fastest, but in the long run, the site that takes off the fastest usually snowballs in growth, eventually drawing all the audience from its competitors as well. This is because users of the less popular sites realize more of their friends are on the most popular site, and will move to better communicate with their friends. In the long run, we will see one site dominating the market, as we do for Facebook, Twitter and YouTube.
Of course new sites that have similar purposes can rise up and overtake an existing popular site. The textbook example is MySpace and Facebook. I believe Facebook was able to get a head start in spite of the presence of MySpace because they fundamentally serve a different segment of the market. MySpace is more for teens who wanted to make flashy user pages, whereas Facebook started off targeting college students and emphasized privacy. One can argue that Facebook has more features and is overall just "better" than MySpace, but the important thing about the network externality is that it undermines the classical perfect competition in that the better product objectively may not really be better for users, because of course, the users also add value to the site. I personally think Facebook is better than MySpace, but I do not think it was based on superior quality alone that Facebook has overtaken MySpace. The initial differentiation of the two products is important to draw the first wave of users.
Now that Google+ is trying to compete with Facebook, I do not see much differentiation between the two sites. They seem to be essentially the same product, so I will be very surprised if Google+ does suddenly explode in popularity and become the next social networking site. At best, Google+ will end up being like Google Buzz, a less popular version of Twitter that comes with our GMail accounts.
One thing that Google+ does have going for it though, it that it comes bundled with Google accounts, which a lot of people already have because of GMail. This somewhat undermines the network externality that Facebook holds because it makes the cost of making a new account nearly zero, and gives Google+ a large initial user-base of everyone who owns a GMail account. However, owning an account is not the key to network externality. The key value added is content and having an audience. But these two are sort of self-fulfilling in that only if I expect people to check Google+, will I post content there, and only if I post content there, will more people check Google+. Ultimately, a lot rests on people's initial beliefs about the future of Google+. If people have faith that more people will read it, it has a surviving chance against Facebook. The ultimate outcome, we shall see.
Notice that for online products that do not have network effects, Google has managed to replace major competitors. We all use Google search, GMail, sometimes even Google Docs or Calendar. The thing is, more users of these products do not make these products more valuable, so when Google releases these products, it likely only competes with market leaders only on quality, with the additional edge that Google is able to supply all these functions under one account instead of forcing users to go to separate sources for everything.
The unifying advantage that Google products have is called economy of scale. It is a rather different phenomenon than network externality, although one can generally understand both to be economic versions of "bigger is better." An economy of scale in classical production theory means less average cost from producing a lot of goods. In the Google case, by consolidating every product into one account, users face a smaller cost of signing up for different accounts, downloading different products, etc. by using Google everything.
It will be interesting to see whether Google+ can become the so-called next Facebook. In some ways, this will sort of be a battle between network externality and economy of scale. Although to be honest, unless if people actually believe others will use Google+, or plan on using Google+ a lot (will you?) it doesn't stand much of a chance against Facebook. But of course, it's Facebook's market to lose.
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