Platforms, Network Effects, And What Hive Is Missing

Most of us are familiar with network effects. This is something regularly discussed, including the concepts of Metcalfe's and Reed's law. These try to value networks and go back to the study of communication systems. The approach was applied to social media networks (Facebook in particular) and it was shown to be true.

Here we see what most people understand as network effects. Therefore, it is always the same answer for platforms: more users.

After all, isn't this what network effects are all about?

Not exactly. The problem with this is it only covers a portion of the whole. It is the missing piece for many platforms, including Hive.

Let us take a look at the concepts and what truly needs to be done.

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Non-Primary Network Effects

The primary network effects are what we just described. Grandma has a Facebook account because there is where she can find her family. It centers on the idea that people are their because of others who are also utilizing the platform. This is very powerful, as we know, and extremely difficult to break. It is also why, regardless of what Zuckerberg does, these usage on his platforms keeps growing.

Naturally, this is not absolute. The network effect can be broken. What we need to take away is how difficult it is to break.

This is why newcomers like Hive will repeatedly fail. Even the associated applications are going to have a tough time.

Which brings us to secondary effects.

Not all platforms are dependent upon our friends and family. Do you know which of those people utilize Google search? Stay at AirBNB? Ride in Uber vs Lyft? Listen to Spotify?

All of these are example of platforms yet they do not have the primary network effect. They do, however, have one which means there is something else in play.

Here is where platforms needs to focus their attention. Sadly, little is given.

Industrial Revolution

We are embarking upon a massive shift in the economy. This has not been seen since the Industrial Revolution.

What made that period of history so revolutionary from an economic perspective. The advancement during (and post) that era saw a massive rise in the economies of scale. Here we had the supply side part of the equation explode.

Through the economies of scale, prices became cheaper as products were more prevalent. Production from factories increased, impacting the entire supply chain. As a secondary factor, the demand, overall, increased as more was available. It was not, however, the demand that drove things.

When efficiencies of this nature are gained, the entire "pie" gets bigger. The consumption occurs in a couple of different ways. Population growth is the most obvious since more people require more output simply to provide everyone with the same level as everyone else.

Our second area is the standard of living. As people utilize smartphones, automobiles, air travel, and personal computers, the affordability keeps growing. Let us take computers. Half a century ago, they filled an entire floor of a building and were only available to entities such as insurance companies. Today, we have kids walking around with them.

Demand Side Revolution

Platforms are another revolutionary force. This affects the demand side in ways never seen before. At the core of this are platforms.

Essentially, these economies of scale are driven by the users creating more value for each other. This ends up, eventually, creating more users as the appeal of the platform grows.

Here is where the secondary network effects are so evident. It does not matter who is on Google, AirBNB, or Uber. The experience is enhance by the design of the network effects.

For example, search is enhanced with each one that is undertaken. Even though the individuals are not related in any manner, their activity is benefitting other users. AirBNB doesn't require millions of options for each user. In fact, one room (house) is all that is required.

Platforms specialize in internalizing the externalities. It is not always about more as much as alignment. After all, you do not want 2x more responses to your search query. Instead, you want the one or two accurate answers. Quantity is not required.

This comes from different participants offering up what is needed. For something low value, such as social media, this requires numbers. When we move up the value curve, it is the opposite.

Creating Stickiness

Have you come across anyone who asks why the retention is so low?

Once again, this is where network effects enter. It is also why marketing of these types of systems is doom to fail.

Platforms can push the demand curve further out. However, without the network effects, no impact is seen. The digital world allows for rapid entering and exiting, something people utilize regularly.

What is missing is the design of network effects that make it sticky. Without this, one is simply marketing a leaky boat. There is nothing there to keep the majority of those who arrive. Isn't this exactly what Hive experienced?

The most successful platforms layer network effects on top of each other. This is what Google, Amazon, Apple, and Netflix all have in common. They are the leaders which is evident in their market capitalization.

Apple is the master at network effect design. To start, they offer a smartphone at a price that is many times the competitors. That means, to enter their platform, requires a significant investment. Think about it, people are paying to join Apple's world.

Once inside, they are an assortment of secondary network effects that arise. People are given storage space for their data, including photos. They have access to a host of applications that are utilized. Most of these are designed by third parties that have nothing to do with Apple. Here we see the company taking the positive benefits from outsiders and spreading it across the entire ecosystem.

Apple is not a social media platform yet it has some of the most powerful network effects in the world. The company did generate some of the primary effects with an application such as Facetime. However, with the abundance of video messenger applications, this is not much of a moat.

Nevertheless, it remains as the most valuable company in the world. It all stems from the design.

Hive Needs To Do This

Hopefully it is evident where Hive went off the tracks.

Unless there is a concerted effort to create what is described here, applications will fail. It is really that simple. If we do not understand the waters we are swimming in, drowning (or getting eaten) will result. We all know where Hive has gone.

Let us harken back to what is talked about on Hive: marketing.

Many assert this is what is needed. The mantra is we need more people on Web 2.0 promoting Hive. Can you see why I think this is completely wrong? Why have all marketing efforts on Hive failed? Why is the message falling on deaf ears?

The answer lies in we have no message. Show me the network effects built into any part of the system. Where is the design by applications to generate this? The answer is we do not have it. Thus, there is really nothing to keep people on Hive.

It is useless to market when there is a major hole in your boat. Without the basics of platform building, the ecosystem is going to suffer.

To be clear, this is not a base layer situation. This does not apply at that level. The basic offering of the blockchain is all that is required. We have decentralized data storage, account management, and feeless transactions. This is the basis to utilize.

Instead, we are referring to the platforms (applications/games) that are on here. This is where the failure resides. Until projects fill their holes, they are going to suffer the same fate.

Ultimately, it is transactions that create the value. This is true whether it is rides, rooms, or other products. Hive does have one advantage, feeless transactions. Platforms become prevalent as the cost of each transaction declined. This allowed for large scale aggregation of smaller network effects.

What have I been discussing regarding building databases?

This is one critical way the demand curve can be pushed further out.

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