Allowing third parties access to the online giants is as risky as it is profitable
Digital networks have two significant properties: they can expand very rapidly, given the right conditions, and, if they do grow, powerful network effects kick in very quickly. A network effect is the phenomenon whereby the value of a network increases according to the number of people using it. In the 1980s, Bob Metcalfe tried to quantify the multiplier effect of additional users with what became known as Metcalfe’s law, which says that the value of a network is proportional to the square of the number of users. A network with 10 users has a value of 100, but one with a thousand users has a value of a million (1,000 squared).
Ever since the web arrived, the overriding mantra of online entrepreneurs has been “get big fast”: recruit users or customers as quickly as possible to get to the point where the network effect kicks in and discourages potential competitors. For most of the successful firms, the way to achieve this was to offer free services. This was the route chosen by Google and, later, Facebook and YouTube. For Amazon, growth was achieved by low prices, efficient dispatch, good customer service, prompt delivery and a colossal inventory.