Which comes first? Filling out a two-sided network

7 April 2011 | 1 Comment

Lately, I have been thinking a lot about the classic ‘chicken and the egg’ problem that network businesses face every day in the early stages of the corporate lifecycle.  As I noted in my post “ The power of a simple business model ,” when network effects are present in a business, the value of the business increases as each incremental user is added. Think eBay: it is more valuable for buyers with each incremental seller, and vice versa.

So, for businesses like eBay, which comes first: The sellers? Or the buyers? How do you get both?

One company I have been speaking with has – by my estimation – come up with a truly disruptive business model in the media space.  Indeed, they are proposing to turn a large, dynamic business on its head by reframing the way promotion of new content is done to end customers.  However, the value of the business is primarily dependent on end customers using it to begin with. While they have one side of the network – the producers – clamoring to use it and excited about the prospects, they are currently using it for free with knowledge that paying services will ‘switch on’ when a critical mass of end users of the service has been reached.

The key issue has become: how do they get the end customers using it?

This is where deliberate product strategies to drive usage come into play. Chris Dixon has written about this on several occasions and proposed clever solutions: here and here .  However, the writing that I have found most useful for framing my thinking has come from the inimitable Joel Spolsky in this post .

Spolsky frames the issue as a lack of ‘backward compatibility’. He states

If you’re in a market with a chicken and egg problem, you better have a backwards-compatibility answer that dissolves the problem, or it’s going to take you a loooong time to get going (like, forever).

Think of it this way: a new operating system has very limited value without software to run on top of it. This issue can be solved by allowing compatibility with solutions currently used by the customers you want to steal away.

In media, backwards compatibility means offering what the alternatives offer in terms of an experience to really hook the mainstream, or alternatively play to a niche.  If it’s music, then one needs to offer an equivalent content library. If it’s video sharing, one probably needs to start in a niche of really avid video sharers to gain a critical mass then expand into other niche areas before taking on mainstream competition. Meta layers are an interesting way to approach the market (say, offer better discovery of videos on other sites, think Metacafe versus YouTube , or Shortform ‘s channel approach) but the process must be *much* better than what is currently available on the site leader.

Most companies don’t have the luxury of taking “like, forever” so deep thought around this issue is necessary to figure out what exactly ‘backward compatibility’ means for that particular industry.

  • http://twitter.com/dgeorge Devon Angelpreneur

    Great post Kyle.u00a0 nWe’re approaching the backwards compatibility issue in a very particular way by disrupting an existing/ongoing supply and demand dynamic and leveraging supply economies of scale.nOur group would love to hear your take on our process/product.Going to email you now.nThanks for the thought provoking post.