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
 Companies that Harness
the power of networks will
dominate the internet
COLLECTING DATA IS
LESS VALUABLE THAN
CONNECTING PEOPLE
WHAT ARE NETWORK
EFFECTS?

“When the value of a product

to one user depends on how
many other users there are.”
- Shapiro, Varian
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
THE POWER OF NETWORKS

• Network effects produce

winner-take-all markets
• The big get bigger
METCALFE’S LAW

value
increases
with n2
METCALFE’S LAW

value
increases
with n2
METCALFE’S LAW

value
increases
with n2
METCALFE’S LAW
Potential Value of Network
increases with n 2

Size of Network (n)

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

Communicatio
n
Marketplaces Networks Games Platforms
eBay Facebook World of Warcraft Apple iPhone
Craigslist Twitter Zynga Facebook
Skype ForSquare
LinkedIn
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
 • Craigslis
t
• MySpac
e
• AIM
• Ebay

THE BEST PRODUCT DOESN’T

ALWAYS WIN
 A NATURAL MONOPOLY:
EBAY
Registered Users (MM)

Source: Company Filings

 A NATURAL MONOPOLY:
EBAY
Registered Users (MM)

Source: Company Filings

“A MONKEY COULD RUN THIS
BUSINESS”
 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
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
Search Index Volume

Source: Google Trends

2004
 FACEBOOK VS. MYSPACE
Unique Visitors (MM)

Source: comScore Media Metrix

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

CAMPUS WARFARE
BATTLE FOR GERMANY
 BATTLE FOR GERMANY
Unique Visitors (MM)

Source: comScore Media Metrix

 BATTLE FOR GERMANY
Search Index Volume

Source: Google Trends

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.
 GOOGLE DOESN’T OWN
NETWORKS
NETWORK INFORMATIO
N
SERVICES SERVICES
• AdSense • AdWords
• Dodgeball(?) • Gmail
• Orkut • Search
• Google Talk(?), • Maps, etc.
Wave(?)
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 of
the Network Service

Sean Parker
Web 2.0 Summit
October 22, 2009