Network Effect* & Long Tail

• Adapted from notes by Prof. John Gallagher, Boston College and from
• http://ezinearticles.com/?Network-Effects-in-the-Web-2.0-Economy&id=1505581

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 Web 2.0 foundation attributes

 These two attributes frame the economic 
model of Web 2.0 services. They allow services 
to scale efficiently to accommodate many 
customers
 Scale ‐ doing things more efficiently with 
increasing size of operation
 Supply side 
 Demand side – network effect

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 Network Effect - Definition

 The network effect is the effect one 
user of a good or service has on the 
value of that product to other 
people
 The value of a product or service 
increases as the number of users 
grows.  More users = more value
 They’re among the most important 
reasons people pick one product or 
service over another 
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 Examples

99% of products/services do not have network effect but the above products/services do

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Network Structure – One sided market

 Derive their value from a single class of 
users
 For example, WeChat/Facebook users 
attracting more WeChat/Facebook users 

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Network Structure – Two-sided market

 Derived value from two distinct categories 
of network participants

buyers
Drivers

Passengers
sellers

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Sources of Network Effect
Person-to-person communication feature

• Telephones, fax machines, email, WhatsApp/WeChat

Value from trading volume, number of partners

• eBay, Uber/Airbnb

Value from more nodes in a network

• BitTorrent, P2P Networks

Value from user-generated ‘content’

• Web 2.0, Wikipedia, online communities, …

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Long tail - Chris Anderson

•Coined by Wired Magazine writer Chris Anderson

in 2004

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Pareto

A statistical distribution or the 80:20 rule

Pareto principle:
• 20% of anything produces 80% the effort
• 20% of the people own 80% of the wealth
• 80% of the total power in the planet is
consumed by less than 20% of the countries
• 80% of the problems in a company are
created by less than 20% of the employees

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 What is Long Tail ?

Products that are low demand or have low sales volume can 
collectively make up a market share that rivals or exceeds the 
relatively few current best sellers and block busters, if the 
store or distribution channel is large enough.

http://slymarketing.com/great-example-long-tail-marketing
 Long Tail and Web 2.0
Democratize the tools of Democratize the tools of
Connect supply and demand
production distribution

Result : More access to niches

Result : More Stuff, which which fattens the Tail Result : Drive business
lengthens the Tail from hits to niches

source : The long Tail source : The long Tail source : The long Tail

 Everyone is able to make their  • Every one can distribute their  • Directly connect supply and 

own content  own content demand efficiently
 The traditional line between  • Lower the search cost, minimize 
producers and consumers  has  hassle, wrong turns
• Examples
blurred. • Explore unknown together
 Internet newspaper
 Examples
 Lulu.com ‐>Self distribution site
 Personal Computer  CNN i‐report • Examples
 Apples Garage band,  Google wisdom‐of‐crowds
 Astronomy’s Pro‐Am movement  Amazon recommendations
 Wikipedia peer production  customer review 

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Examples: Democratize the tools of production

 The Wikipedia : Peer production – mass volunteerism 
and amateurism
 Apple GarageBand App ‐ digital audio workstations for 
macOS and iOS that allows users to create music or 
podcasts

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 Examples: Democratize the tools of distribution

 Lulu.com : DIY publisher 
 Not for the money, but for distributing your message. Use it for 
reputation. 
 The traditional line between producers and consumers has blurred 
 Amazon. com : Inventory on Demand 
 Virtually connect centralized supply with scattered demand 
 Print‐on‐demand : The idealized form books staying as digital files until 
customers are purchase Near‐zero inventory cost

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Examples : Connect Supply and Demand

*combining infinite shelf space with real‐time information 
about buying trends and public opinion gives rising 
demand of an obscure book
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