Critical to the success of platforms is accumulating and monetizing network effects. 

Elizer Varias

Be it social media or online marketplaces, acquiring and retaining active membership is key to generating sustained profitability. However, these network effects can possibly create structural barriers that act as deterrent to potential entrants, which in turn increases the monopoly power of the incumbent. To what extent can platforms use network buildup as a barrier entry, how enforceable is it, what can a potential entrant do to diffuse this, and should governments look into regulation?

The Online Network as a Structural Barrier

Think back to the classic example of utility companies. Due to the high fixed costs associated with laying electrical grids, water pipes and gas lines, in comparison to the low marginal costs of maintaining and operating the utilities, significant scale economies are required to become profitable. Thus, this network effect acts as a structural barrier to future entrants, as they will only be taking a portion of the market which will be insufficient to cover fixed costs.

While utilities generate network effects from a cost perspective, driving down costs with scale, online and mobile platforms derive value from network effects. Platforms do not suffer from high fixed costs. In fact, the start-up cost of an online platform is very low nowadays. At the same time, platforms in their infancy are unable to charge high prices, since users are exposed to a small market size at this stage. Only when network benefits set in will there be higher payoff to the paying users, spreading their cost to a wider market.

Survival of the Most Connected

With the most recent flurry of mobile apps and platforms, also came the inevitable dwindling to a few powerhouse tech companies. Indeed, the pace at which consolidation occurs is as rapid as the disruption process itself, and breaking into market segments is becoming more difficult. And first mover advantage does not hold true in all cases (think of Facebook and its myriad predecessors).

It is true that the digital age allowed us to better cater to niche markets due to the low start-up and operating costs, but at the same time, we are seeing titans emerge from the riffraff. And with scale comes bargaining power, and the ability to dictate how data is handled. In this information age, are we ready for data to be monopolized?