I came back from a weekend away to find that Nick Carr had picked a fight with Tim O’Reilly about Google, and whether the company’s size and market power has been a result of network effects. This argument was a sort of spin-off of an issue that came up earlier in the week, when Hugh McLeod pondered the topic of “cloud computing” and whether it could produce a giant monopoly. O’Reilly argued that it likely wouldn’t, because it doesn’t benefit from network effects in the same way that Google does.
Nick took issue with this line of argument, asking:
“Is the network effect really the main engine fueling Google’s dominance of the search market? I would argue that it certainly is not.”
In fact, he says categorically that Google’s rise to dominance has “nothing to do with the network effect.”
I don’t know why a smart guy like Nick would make an argument like that, but I think he’s totally wrong. Let’s review what the network effect means: As Tim describes it, it refers to systems that “get better the more people use them,” which is a pretty good paraphrasing of the Wikipedia definition as well as other definitions you can find in various places. The classic example used is the telephone, which becomes more useful the more people use it.
Nick says that this doesn’t describe Google at all:
“The fact that my neighbor uses Google’s search engine, rather than Yahoo’s or Microsoft’s, does not increase the value of Google’s search engine to me, at least not in the way that my neighbor’s use of the telephone network or of Facebook would increase the value of those services to me… Indeed, if everyone other than myself stopped using Google’s search engine tomorrow, that would not decrease Google’s value to me as a user.”
I think Nick is being disingenuous here, and/or splitting rhetorical hairs. To argue that Google doesn’t benefit from the network effect is to deliberately miss the point. Google’s strategic point of differentiation from other sites was the fact that PageRank does a better job of determining worthwhile links. And how does it do that? By measuring how many sites (and which ones) point to them. The more sites, the higher the page ranks. I’m simplifying it, but that’s pretty close to how it works.
That is at least as strong an example of the network effect as the telephone, and probably more so. It’s true that it doesn’t matter whether Nick’s neighbours use Google or not. That’s because Nick is deliberately focusing on Google the search engine — the little box with the search button — and trying to distract you from the other Google: the indexing engine that produces those links, and uses powerful network effects to do so.
I think part of the problem is that the network effect we’re talking about doesn’t really belong to Google per se — it’s inherent in the nature of the Web. But let’s go back to what Nick originally said: He said that Google’s rise to dominance had “nothing to do with the network effect.” That’s just plain wrong. Google may not have invented the thing that produced the network effect (i.e., the Web), but it came up with algorithms that took advantage of that effect better than anyone else.
I’m not sure why Nick wants to pretend that network effects don’t exist, or that they didn’t play a role in Google’s rise to prominence, but he’s going to have to do a whole lot better than that.
Tim O’Reilly has responded to Nick’s post, and as far as I can tell he says pretty much the same thing that I did, but better — and somewhat longer :-)