Activity 5: Activating Network Effects

Source

Last.fm is a web application whose primary focus is on recommending music to their users. This is done by using a desktop or mobile application called "The Scrobbler" which records what songs have been played on the user's computer or device. This information is then synced with the web application, which compares what the user has been playing and how often with other users who also listen to these songs, then makes recommendations. Users can also be recommended artists by using the tagging system and searching for a genre they enjoy. The application also has a range of other capabilities, such as adding and sharing music tastes with friends and sending messages to them. Users can also see gig information, share if they are planning on attending and make comments on them, as well as on the artists, albums, and tracks in general.

Network Effects

Last.fm has made great use of activating network effects. Network effects are the advantages to a platform for having a larger user base^[1]. Positive network effects encourage the growth of the network, and with more people using the application, its value increases. With a higher value, this in turn encourages more users.

Direct Network Effects

The direct network effects of a web application are that its value increases (both according to the users and other stakeholders) as the user base increases. This means that users are more likely to make an investment into the platform as the number of its users increases. In Last.fm's case, as more people use the application, more people are having their musical tastes recorded, allowing the application to make more informed recommendations to its users. It also means that more users are able to interact with each other, making the application more social and enjoyable to use.

Indirect Network Effects

Indirect network effects are those advantages gained from third party complimentary services which increase the value of the original product. Last.fm has allowed these to be created by releasing an API, allowing other developers to create services relating to the web application.

Cross Network Effects

Cross network effects are that a rise in one group of users leads to an increase of value to another group of users. For Last.fm, as with many other websites, an obvious connection would be a rise in casual users would result in a higher number of advertisers, allowing for the website to gain more funding, and in turn, support more users. An increase in users and record label employees who add artist, album, and song information also adds value to the application for those who don't, as they have a wider range of music to share and be recommended, and the information provided is likely to be more correct as more people are checking it.

Local Network Effects

Local network effects, also known as 'social network effects', is that a user's decisions are influenced by those in a typically small set of other users. Therefore the most benefits can be gained from those the user is connected to, not just the size of the user base as a whole. Last.fm encourages its users to connect with friends, providing the option to search a user's Facebook friends for their accounts. By building a network of friends in the application, users are able to get music recommendations from their friends, send them messages, and share what gigs they are going to. Therefore, although all users are able to get benefits from the applications, those with a group of friends who they base their interactions with the platform around are able to gain the most.

Future

Last.fm previously offered a music streaming service, which was available until last year. This signals that they are focusing more on their recommendations system as well as providing more accurate music information. Last.fm should also consider improving their mobile offerings, which currently, at least on Android, are severely lacking. As for extending their use of network effects, they could improve their cross network effects by making it easier for those who edit artist, album, or song information, as well as provide record companies more incentive to take control of their artists' pages.

In what other ways do you think that Last.fm is using network effects well? Tell me about it in the comments.

Reference

1. Shuen, A. (2008). Web 2.0: A strategy guide: Business thinking and strategies behind successful web 2.0 implementations. Sebastopol, CA: O'Reilly Media, Inc.