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The New Era of

the Network
Service
the Network
Service
Sean Parker
Web 2.0 Summit
October 22,
2009
the Network
Service
the Network
Service
Why companies like Facebook,
Twitter, Ebay and Apple (but not
Google) will determine the future
of the internet
Companies that Harness
the power of networks
will dominate the
internet
COLLECTING DATA IS
LESS VALUABLE THAN
CONNECTING PEOPLE
WHAT ARE NETWORK
EFFECTS?

“When the value of a


product to one user
depends on how many
other users there are.”
- Shapiro, Varian
THE POWER OF
NETWORKS
• 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
• Network effects produce
winner-take-all markets
• The big get bigger
METCALFE’S LAW

value
increases
with n 2
METCALFE’S LAW

value
increases
with n 2
METCALFE’S LAW

value
increases
with n 2
METCALFE’S LAW
Potential Value of Network
increases with n 2

Size of Network (n)


WHAT IS A NETWORK
COMPANY?
Basic unit of value for a network
company is not the data it stores, it’s
the number of connections it facilitates

Communicat
ion
Marketplace Networks Games Platforms
s Facebook World of Warcraft Apple iPhone
eBay Twitter Zynga Facebook
Craigslist Skype ForSquare
LinkedIn
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
• Craigsli
st
• MySpac
e
• AIM
• Ebay

THE BEST PRODUCT DOESN’T


ALWAYS WIN
A NATURAL MONOPOLY:
EBAY
Registered Users (MM)

Source: Company Filings


A NATURAL MONOPOLY:
EBAY
Registered Users (MM)

Source: Company Filings


“A MONKEY COULD RUN THIS
BUSINESS”
WHY DID EBAY BUY
SKYPE?
Purchase Price in 2005:
$2.6B
•75mm Registered
•$70mm Revenue

Purchase Price 2009: ?


•521mm Registered
•$740mm Annualized
Revenue
Source: 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
THE FALL OF FRIENDSTER
Search Index Volume

Source: Google Trends


2004
FACEBOOK VS. MYSPACE
Unique Visitors (MM)

Source: comScore Media Metrix


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 market
Tactical Facebook
Schools Schools
Facebook
Southwestern Berkeley
Baylor
Texas A&M Schools
Columbia
Berkeley
Enemy Schools UTA Berkeley
Cornell
Columbia
Baylor Cornell
Dartmouth
Columbia Harvard
Dartmouth
Stanford Stanford
Harvard
Yale
Stanford
Yale
Yale

CAMPUS WARFARE
BATTLE FOR GERMANY
BATTLE FOR GERMANY
Unique Visitors (MM)

Source: comScore Media Metrix


BATTLE FOR GERMANY
Search Index Volume

Source: Google Trends


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.
GOOGLE DOESN’T OWN
NETWORKS
NETWORK INFORMATIO
N
SERVICES SERVICES
• AdSense • AdWords
• Dodgeball(?) • Gmail
• Orkut • Search
• Google Talk(?), • Maps, etc.
Wave(?)
CLOSING THOUGHTS
1. Over the next decade the aggregate
value of the emerging class of network
companies will dominate the internet
• NEW economic value on the internet
will not be generated by search
• Google will continue to be an economic
powerhouse but its relative importance
on the internet will decline
The New Era of
the Network
Service
the Network
Service
Sean Parker
Web 2.0 Summit
October 22,
2009