Getting sued, laying off most of your workforce, losing your third chief executive and then being bought out doesn't sound like the history of a successful company that could teach Internet businesses a key lesson. But Napster's problems make it one of the best examples of the value of "network effects" and how you can make your users build your service for you.
The Internet and the open source movement have made huge changes to businesses in recent years, but the jury is still out on how those changes add up to a new way of doing business. Speaking at BEA's recent eWorld conference, Tim O'Reilly, chief executive of computer book publisher O'Reilly & Associates, suggested that the licensing question that exercises many open source advocates -- and the companies that see open source as a way of saving money by switching away from Microsoft -- is actually irrelevant.
The most popular Linux applications aren't databases or office tools, he points out: They're services such as Google, Amazon and PayPal, which run on servers running open source tools such as Linux, FreeBSD, Apache, MySQL, PHP and Perl. Just saving money on software licenses is not what makes them successful. Also, they don't need to let anyone see the source code because they don't distribute them.
"These are all fiercely proprietary companies, so something is wrong with the idea that once we have open source software, there will be no intellectual property," says O'Reilly. "We have people like Jim Allchin [of Microsoft] saying that open source is an intellectual property destroyer. It's just not true. Here you have these companies with huge amounts of intellectual property but it's sitting somewhere else in the business."
When tools and services get more valuable as more people use them, that's known as the network effect. Telephones, fax machines and email are the most obvious examples, but network effects drive many successful businesses. New users pick Microsoft Office because it is what most employers want you to know, and the more people who use the Office file formats, the easier it is to share documents. Thus, network effects don't just bring you new customers, they make what you sell more valuable to old and new customers alike.
O'Reilly thinks that is the key for open source and internet businesses.
"What really matters is the architecture of systems: open source is ultimately about systems that create and manage and magnify network effects," he said.
That means if you design the system right, you won't need to do the hard work yourself: your users and partners will do it for you.
Not because you are paying them (like Yahoo's editors) or out of the goodness of their hearts (like the volunteers who compile the Open Directory or the Wikipedia), but as a side effect of what they're doing for their own self-interested reasons.
Napster and other file-swapping services didn't spend time building a complex network for their users: they gave users the tools and the incentive to do it. They are not the only services to take advantage of their users. EBay's customers don't just provide the products and content on the auction site, they police each other by giving feedback. Google's search tools help users find information on the web, but the PageRank algorithm exploits the millions of links that individual web developers create to pages they think are interesting.
Amazon uses customers' searching and spending habits to suggest relevant products: When you search, you don't get the newest or cheapest books unless you specifically ask for them, you get the ones that are most popular in terms of reviews and sales. Look for information on Microsoft's support site and, as well as official resources, you will find links to relevant discussions in public newsgroups, so you can see if someone has already found a solution.
These are ideas any company can use on its site or in a service, so you need to make sure you own the user-generated data and metadata that give your service the network effect.
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