How to Disrupt Network Effect Incumbents

By @zachfeldman
Written on Aug 23, 2016

TL; DR: A New Form of Copyright and Distribution APIs

Broadly, I define a “network effect” company as a firm whose value is mostly tied up in the connections between those using the company’s platform. For instance, Craigslist is a network effect company because users of the platform only find value in other users and the give and take between these two groups is what propels the company’s growth. Uber is a similar type of company, holding a monopoly on the information exchanged between riders and drivers. Uber has used their network effect, accomplished through superior first-mover technology and excellent customer experience, to capture a very large share of the taxi market.

As network effect companies gain more and more traction, the ability for underdogs and new companies to get any kind of foothold is diminished. In order to allow competition and for the rights of those participants in these network effect companies, a new type of patent should be created. It gives these companies exclusive license for 6 years to reap the benefits of their network. From that point forward, network driven companies should be obligated to create a public facing API for customers, jobs, rentals, job listings, or other items on their platform. For instance, Uber would need to create an API for requesting a ride that could be used by an external interface, as well as the ability to accept rides from other platforms.

Presently, our situation entails the creation of brand new monopolies with every “Unicorn” tech company and our politicians don’t have the knowledge to understand or keep up with these systemic and global changes. How can anybody call what Uber is doing right now anything but creating a monopoly? It is impossible for other businessess to start and be competitive with Uber because of their massive and global scale. This is what makes them so valuable, but I’d argue that Uber and outside parties could both possibly benefit from access to an open API.

Taking this argument a bit further, perhaps governments could create entire departments to enable open flow of information between businesses. 18F or the USDS could create APIs for these services and instead of living in the winner-takes-all economy that is slowly starting to dominate the landscape, we could more fairly distribute the winnings by creating a layer between service providers and those in need of services.

There are obviously a lot of complications to a plan like this, the most obvious one being the fights that lobbyists from these network effect companies would wage to keep their market advantages intact. Many would call this communism or socialism in some form. But I’d like to think that society from a wider point of view could see the benefit and fight against these moneyed interests to build a better and more open economy for all.





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