The New Era ofthe Network Service

Sean ParkerWeb 2.0 SummitOctober 22, 2009

The New Era ofthe 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

“When the value of a product to one user

depends on how many other users there are.”

WHAT ARE NETWORK EFFECTS?

- Shapiro, Varian

• 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

THE POWER OF NETWORKS

METCALFE’S LAW

valueincreaseswith n2

METCALFE’S LAW

valueincreaseswith n2

METCALFE’S LAW

valueincreaseswith n2

METCALFE’S LAW

Size of Network (n)

Potential Value of Networkincreases with n2

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?

Marketplaces

eBayCraigslist

Communication

NetworksFacebook

TwitterSkype

LinkedIn

GamesWorld of Warcraft

ZyngaForSquare

PlatformsApple iPhone

Facebook

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

• Craigslist

• MySpace

• AIM• Ebay

THE BEST PRODUCT DOESN’T ALWAYS WIN

A NATURAL MONOPOLY: EBAY

Source: Company Filings

Registered Users (MM)

Source: Company Filings

Registered Users (MM)

A NATURAL MONOPOLY: EBAY

“A MONKEY COULD RUN THIS BUSINESS”

WHY DID EBAY BUY SKYPE?

Source: Company Filings

Purchase Price in 2005:

$2.6B$2.6B•75mm Registered•$70mm Revenue

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

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

Source: Google Trends

Search Index Volume

2004

FACEBOOK VS. MYSPACE

Source: comScore Media Metrix

Unique Visitors (MM)

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

CAMPUS WARFARE

Facebook SchoolsBerkeleyCornell

DartmouthHarvard

Yale

Enemy SchoolsBaylor

ColumbiaStanford

Facebook SchoolsBerkeley

ColumbiaCornell

DartmouthHarvard

StanfordYale

Tactical Schools

SouthwesternTexas A&M

UTA

Facebook Schools

BaylorBerkeleyColumbiaCornell

DartmouthHarvardStanford

Yale

BATTLE FOR GERMANY

BATTLE FOR GERMANY

Source: comScore Media Metrix

Unique Visitors (MM)

BATTLE FOR GERMANY

Source: Google Trends

Search Index Volume

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.

• AdSense

• Dodgeball(?)

• Orkut

• Google Talk(?), Wave(?)

NETWORKSERVICES

GOOGLE DOESN’T OWN NETWORKS

• AdWords

• Gmail

• Search

• Maps, etc.

INFORMATIONSERVICES

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 ofthe Network Service

Sean ParkerWeb 2.0 SummitOctober 22, 2009