Ker. Ching. – using network effects to dominate tiny markets

In growing markets new buyers lack information to select the best vendor, the one that fits their needs best. In this absence of information they grasp at straws; other measures which they can understand. Proxies for quality. The simplest model for why you get highly skew’d distributions, like those seen in market share numbers, is to have new entrants link to whom ever already has a lot of links. Market share in one time period generates market share in the next; not just a little bit, but a lot! This is why early movers can have so strong an advantage. They can then create a brand – and a brand is nothing if not a proxy for doing the real work checking if a vendor fits your needs.

GapingVoid is yet another blog written by a consultant who’s attempting to puzzle out how the Internet is reshaping his craft. He’s a marketing consultant. For example he’s currently experimenting with liqouring up gatherings of bloggers to see if that rebounds to the benefit of one of his clients, a vineyard. One of his success stories is English Cut, a high end tailor – $4K/suit. This posting muses about how successful that experiment has been. It’s kind of guilty gloating. He quotes an observer who notes how the English Cut has captured the hub for high end tailoring. It’s become the brand in high end tailoring. He also muses that this kind of tailoring isn’t a particularly scalable business; double your customers doubles your work. Which is trouble if you have to do it all by hand yourself.

All this is very mysterious. Clearly blogs inject more information into the market. Since lack of data aids early movers blogs would appear to tempering early the mover advantage of the mindless linking to what ever is popular. But just as clearly blogs don’t do that. One reason they don’t: the blog gets caught up in it’s own early mover effect. Observe any class of blogs and you’ll find few hubs that arrived late to the game. Worse yet the late arriving hubs often appear to be explained by their association with older or larger hub. That skewed distribution means that if your a winner then it’s Ker. Ching. and if your not then your a dead body.

This seems to it implies that the globalization implicit in blogging is very damaging for small players. If the market doesn’t expand tremendously then blogging is just another tool for consolidating an industry. That blogging, in this case, is just another distribution channel – a distribution channel of marcom. Distribution channels define the links, The links lead to the skewed distribution. The skewed distribution creates a pile of dead bodies. Traditionally some industries, like high-end tailoring, because they don’t scale the participants don’t threaten each other and the members can be quite collegial. Enter the internet where the network effects rule and that collegiality at risk. It’s winner take all.

0 thoughts on “Ker. Ching. – using network effects to dominate tiny markets

  1. bhyde

    Ian, great reminding. Puts an interesting light on the critique of main stream journalists about the professionalism of amateur bloggers. (see airline sandwich story: That’s not unlike the way that in some industries you see standards introduced to create a quality floor; in part to avoid the problem that Akerlof quantifies.

    I wonder if you could actually quantify extent that a market can be spoiled by making it totally open market. I guess you might argue that the highly skew’d nature of the market helps to prevent the severity of that spoiling. Sure there are 10 million blogs; but blog quality is defined by the top 1000; and the rest are viewed as being just used cars.

  2. hugh macleod

    I’m an optimist.

    As the more cluttered the web becomes (and it was already pretty cluttered 5-10 years ago, let’s not forget), the greater the demand/need for authenticity and relevance.

    What web format that takes matters little. It might be blogs today, but it might be something else in 3 years.

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