- Barring Facebook, the FAANGS and other so called “platforms” like Uber and AirBnB don’t seem to benefit significantly from network effects. In fact, many of these businesses don’t even have network effects in the first place.
- Many of these businesses actually have low barriers to entry and make little or no money specifically because entry barriers are low. Eg. The world over several independent retailers specialising in a vertical have been able to do to Amazon what Nykaa has done in India. In so doing they have taken away from Amazon some of the most profitable parts of the online retailing and delivered much higher profit margins than Amazon. In fact, outside America it is unlikely that Amazon will ever make money from retailing. Another example of a low barriers to entry business is Netflix – read this article to understand how fragile Netflix’s market share leadership is: https://jscottmo.medium.com/book-review-the-platform-delusion-4769ae8ed440
- These businesses have made sub-optimal capital allocation decisions which has hurt their free cash flows further eg. Netflix is making content and the book argues convincingly that Netflix has no competitive advantage in making content (neither does it have network effects)….”
With Facebook and Netflix already seeing their businesses going backwards (i.e. these firms are now operating on shrinking customer bases), the false logic of network effects is already becoming clearer. What’s even more remarkable that a dating app like Tinder – which you would believe to have the stickiest of customer bases with the greatest scope for network effects – also seems to be suffering the same fate. Quoting from the FT: “Tinder is struggling to attract younger users who are starting to abandon the world’s dominant dating app, as Generation Z singles prefer hotter new services in the search for love after lockdowns.
The well-known app quickly became the dating service of choice for millennials since launching in 2012, as consumers switching from desktops to mobiles left older platforms such as eharmony and Match.com.
The latest generation of young people, who are returning to the dating scene after the pandemic, also appear to be shifting to alternatives to Tinder in the hunt for romance.
Downloads of Tinder, which allows users to accept or reject potential partners with the swipe of a smartphone screen, dropped 5 per cent in 2021 to 70.7mn. Rivals such as Bumble and new start-up Thursday have enjoyed consistent growth, according to new figures from app market researchers data.ai.
That trend has led Tinder to make changes in an effort to achieve new growth, from restructuring its leadership to betting on the so-called metaverse as the future method by which people will meet online.
“Sign-ups have not returned back to pre-pandemic levels,” Gary Swidler, chief operating officer and chief financial officer of Tinder parent company Match Group, told the Financial Times.
“New users remain a challenge and that’s where product innovation comes in. We need to give people a new reason to come into the [dating app] category, they haven’t had something new and exciting in a while.””
It is worth reading the FT article in full because it makes you realise that most social media apps rather than having sticky customers and network effects are actually more like retailing of fast fashion apparel wherein a manufacturer constantly has to second guess what sort of clothes youngsters will find appealing in the next ‘season’. Since it is rarely possible to second-guess customers season after season, such apparel manufacturers shine for a few years and then tend to fade away. That in turn means that investors refuse to give such brands the stratospheric valuations that investors were willing to give the ‘network effects’ plays.
If you want to read our other published material, please visit https://marcellus.in/blog/
Note: the above material is neither investment research, nor financial advice. Marcellus does not seek payment for or business from this publication in any shape or form. Marcellus Investment Managers is regulated by the Securities and Exchange Board of India as a provider of Portfolio Management Services. Marcellus Investment Managers is also regulated in the United States as an Investment Advisor.
Copyright © 2022 Marcellus Investment Managers Pvt Ltd, All rights reserved.