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THE NEW ERA OF

THE NETWORK SERVICE

Sean Parker
Web 2.0 Summit
October 22, 2009
THE NEW ERA OF
THE NETWORK SERVICE
Why companies like Facebook, Twitter,
Ebay and Apple (but not Google) will
determine the future of the internet

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COMPANIES THAT HARNESS
THE POWER OF NETWORKS
WILL DOMINATE THE INTERNET

COLLECTING DATA IS LESS


VALUABLE THAN CONNECTING
PEOPLE
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WHAT ARE NETWORK EFFECTS?

“When the value of a product to


one user depends on how many
other users there are.”
- Shapiro, Varian

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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

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THE POWER OF NETWORKS

• Network effects produce


winner-take-all markets
• The big get bigger

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METCALFE’S LAW
value
increases
with n 2

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

Size of Network (n)

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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

Communication
Marketplaces Networks Games Platforms
eBay Facebook World of Warcraft Apple iPhone
Craigslist Twitter Zynga Facebook
Skype Foursquare
LinkedIn

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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

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• Craigslist
• MySpace
• AIM
• Ebay

THE BEST PRODUCT DOESN’T ALWAYS WIN


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A NATURAL MONOPOLY: EBAY
Registered Users (MM)
3

Onsale
ebay
1

Q1 1998 Q2 1998 Q3 1998 Q4 1998

Source: Company Filings


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A NATURAL MONOPOLY: EBAY
Registered Users (MM)
300

225

150
ebay

75

0
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Source: Company Filings


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“A MONKEY COULD RUN THIS BUSINESS”
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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
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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

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THE FALL OF FRIENDSTER
Search Index Volume
10
friendster
myspace
hi5
8

Source: Google Trends


2004
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FACEBOOK VS. MYSPACE
Unique Visitors (MM)

150
Facebook
Myspace
113

75

38

9/07 11/07 1/08 3/08 5/08 7/08 9/08 11/08 1/09 3/09 5/09 7/09 9/09

Source: comScore Media Metrix


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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
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CAMPUS WARFARE
Win 1

Win 2

Facebook Schools
Berkeley Enemy Schools Tactical Schools
Columbia Baylor Southwestern
Cornell Columbia Texas A&M
Dartmouth Stanford UTA
Harvard
Stanford Columbia Baylor
Yale Win 1 Stanford Win 2

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BATTLE FOR GERMANY
Unique Visitors (MM)

20,000

15,000

StudiVZ Sites
10,000
Facebook

5,000

0
7/1/08 9/1/08 11/1/08 1/1/09 3/1/09 5/1/09 7/1/09 9/1/09

Source: comScore Media Metrix


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BATTLE FOR GERMANY
Search Index Volume

StudiVZ Sites
Facebook

2004 2005 2006 2007 2008

Source: Google Trends


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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.

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GOOGLE DOESN’T OWN
NETWORKS

NETWORK INFORMATION
SERVICES SERVICES
• AdSense • AdWords
• Dodgeball(?) • Gmail
• Orkut • Search
• Google Talk(?), Wave(?) • Maps, etc.

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CLOSING THOUGHTS
1. Over the next decade the aggregate value of the
emerging class of network companies will
dominate the internet
2. NEW economic value on the internet will not be
generated by search
3. Google will continue to be an economic
powerhouse but its relative importance on the
internet will decline

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