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NETWORK EFFECTS: When Bigger Is Better

As businesses grow, there are often negative consequences to customers, employees, and even the company itself. But when networks grow, there are many ways members can benefit. If Walmart gets a new customer, your benefit is negligible. When Facebook gets a new member, each of us has someone new to connect with or learn from—and the platform gets bigger and potentially better with each new user. Online gamers benefit from participation of other gamers. Both are examples of positive network effects—each new addition makes the platform better.

Large, well-managed platform communities produce significant value for each user. Value can be driven by the power of social networks (can I connect, contribute, and get what I need?), demand aggregation (can I buy things?), and application development (can I build things?).

Platforms promote exchanges of information, goods and services, and some form of currency. The ability to monetize that value exchange in some way is key to building a scalable and sustainable platform. Platforms are in the curation business; they match content and connections at scale. Most platforms use an algorithmic filter to screen out or deprioritize less valuable content. Filters and recommendations can help match participants with units of value.

“Network effects turn organizations inside out,” claim the authors of Platform Revolution. That means users run the place. Platforms are like information factories that have no control over inventory. They just attract and match to facilitate value exchanges.

NETWORKS ARE BIG BUSINESS

A Wharton study of 1,500 organizations (using machine learning to scour big data sets) found four primary business models1:

• Asset builders. Manufacturers, distributors, and retailers (WalMart, Ford, FedEx)
• Technology creators. Biotech, healthtech and fintech (Microsoft, Oracle, Amgen)
• Service providers. Consultants, bankers, educators, and lawyers (Aetna, JP Morgan, Accenture)
• Network orchestrators. Social, business and financial (TripAdvisor, RedHat, Uber)

The study found that networks, on average, yield the highest growth, margins, and returns. According to study leader Barry Libert, “Network Orchestrators, which leverage intangible assets, and real time interactions, apply to all organizations regardless of industry.”

Compared to asset builders that make things, service providers who sell hours, and tech providers who sell intellectual property, the study found a large performance differential for networks, which the authors called a Multiplier Effect, owing to the rules of network versus firm centric business models.

Networks bring people together (often called a two-sided revenue model) like credit cards (cardholders and merchants), operating systems (users and developers), recruitment sites (job seekers and recruiters), and marketplaces (buyers and sellers).

Networks often leverage co-creation and network assets (like cars, houses, friends, and insights) to perform better financially than organizations that sell hours or make stuff.

Network leaders even think and talk differently; they use words like platform, network, digital, and mobile to describe their firms and investment strategies, whereas “Asset Builder” leaders talk about plants, property, and equipment as their primary focus and investments.

When a school district gets bigger, it means more headaches—the organization does not necessarily get smarter. But when a personal learning network grows, there's a good chance it can get smarter, because it becomes more likely that another educator faced similar situations. And you gain access to hundreds of resources rather than dozens. When schools join the New Tech Network, teachers gain access to a library of projects they can adopt or adapt. When schools join the Summit Learning network, students gain access to tailored digital playlists, and Summit gains insight into what resources work best.

Large platform networks can continuously run a series of randomized controlled trials with the goal of finding out what interventions really make a difference to student success, improving the outcomes or the efficiency of learning or both.2 Bror Saxberg, who works with the Chan Zuckerberg Initiative (the technology partner for Summit Learning), calls this platform-enabled design work “learning engineering.” It is all about using data to improve the learner and staff experience—and the more data you have, the smarter the system gets.

CAPS NETWORK

Launched in 2009 with 100 students, The Center for Advanced Professional Studies (CAPS) created professional-based learning opportunities for 100 pioneering students. Formed by the Blue Valley School District southwest of Kansas City, the high school career center now serves more than 1,000 Blue Valley students each year. CAPS anchors a network of 74 school districts across 12 states serving 10,000 students. Partner schools commit to five core values:

• Profession-Based Learning. Instructors develop real-world, project-based learning strategies through collaborations with business and community partners. These interactions enhance the learning experience, providing students with college and career preparation.
• Professional Skills Development. Unique experiences allow students to cultivate transformative, professional skills such as understanding expectations, time management, and other essential business values. These skills are critical to providing students with a competitive advantage in their postsecondary education and professional careers.
• Self-Discovery and Exploration. Students realize their strengths and passions by exploring and experiencing potential professions. This allows them to make informed decisions about their future, while learning to exhibit leadership in the process.
• Entrepreneurial Mindset. Instructors create an environment where creative thinking and problem-solving is encouraged. An innovative culture is key to fostering entrepreneurial learning and design thinking.
• Responsiveness. CAPS supports high-skill, high-demand careers through ongoing innovation in curriculum development, programs, and services based on local business and community needs.

CAPS director Corey Mohn finds three keys to network success: relationship building, a high level of trust between stakeholders, and value creation from affiliation. “When members use the network, it's like exercise,” explains Mohn, “and the connective tissue gets stronger.”3

Scaling up success in any organization or educational institution is difficult, but networks can make it much easier. “We view scale as positive,” explains Phil Regier, Dean for Educational Initiatives at Arizona State University (ASU). “We're going to use scale to get better. Digital learning tends to be scale games. As you get bigger, you can make the technology better.”4

Regier uses the Global Freshman Academy, an online learning partnership with edX, as an example of network effects. It allows learners to take open classes anytime and only pay after passing a class. “The math class is fantastic, and the bigger it gets, the better it gets,” said Regier. That's because the adaptive courseware adjusts to each learner and collects thousands of data points that create a greater network effect.

Why is bigger better? More data helps ASU determine which learning experiences are most productive. It helps design more productive pathways by predicting what kinds of help each type of learner will need. “If we have 2,000 students we can improve faster than if 150 students take a course,” added Regier. “The more students I have taking an adaptive course, the better the course will be, the faster and more efficiently students will learn—and learn more skills more deeply.”

By leveraging digital learning, Regier sees the emergence of several very large institutions, what president Michael Crow calls national service universities, that can serve more than 200,000 learners. Through programs like the Global Freshman Academy and ASU partnership serving Starbucks employees, Crow has his sights set on being a super scalable university—a big platform network.5

Impact organizations, as well as mission-driven nonprofit and for-profit organizations, increasingly leverage networks. A few rely on advertisements or sponsorships. Everfi has grown a big business by developing and distributing sponsored curriculum. Some impact organizations provide free services—access to a platform or open education resources (OER)—and sell additional services to boot. EL Education and Open Up Resources offer training around free math and English curriculum. Most education networks are membership or subscription supported.

A handful of organizations rely entirely on philanthropic support for the development of impact networks. They range from voluntary pledge networks like FutureReady to 10 schools that received $10 million monster grants from XQ: The Super School Project sponsored by philanthropist Laurene Powell Jobs.

Some network business models shown in the following table look a lot like an open marketplace, but there are three key...