Network Effects

Let me tell you a story:

Sese is worried. Her son Kaltaso has his heart set on getting a new toy for Christmas. She’s not quite sure what it does, exactly, but it’s the latest thing overseas. At least, that’s what Kal says. He tells her all his online friends have them, that it’s really fun to link them on the Internet and play together.

The toy is expensive, but not too expensive. Sese has talked it over with her husband, and he agrees that it’s good for the boy to spend time online with friends from around the world. If this toy helps with this, then it’s worth it. But there’s a problem: It’s not for sale anywhere in Vanuatu, let alone here on Pentecost.

Sese knows that you can buy things online, but she doesn’t have a bank account yet, let alone a credit card. So she sends an SMS to her cousin-sister Lily in Port Vila, asking for help. Lily works as an administrator for one of the online banking operations that opened up after the fibre optic link was installed. She knows about these things.

Lily texts back, saying that she’s checked on eBay and found exactly what Kal wants, at about 30% less than anywhere else. She’ll just send the cash from her PayPal account. She knows Sese doesn’t have a lot of cash so she asks if Sese could send 20 kilos of kava on the next ship. One of Lily’s boys is going to be circumcised soon, so it will save her a lot of expense. Kava costs about 40% less if you get it straight from the island.

Sese checks with her family, then writes to Lily to say that she’ll put the kava on Wednesday’s ship. But Lily has to promise not to say a word to anyone. Kal chats online all the time with Lily’s second born son, and if he gets word about the gift, it will spoil the surprise.

This little story is fiction, of course. It’s a description of how things could be in two or three years, if we do just a few little things.

There is no lack of vision today among those who think about technology and what it means to Vanuatu. Discussions abound and plans are afoot. Politicians and businessmen alike are positioning themselves, moving the pieces into place, considering the costs.

Simple consumer pressures are starting to be felt, as well. The law of supply and demand is inescapable. If enough people demand previously unavailable goods or services at a reasonable price, inevitably someone finds a way to deliver.

Interpreting demand and reacting appropriately to it, however, requires insight that can sometimes seem a little counter-intuitive. You see, demand for communications-related services is driven by perceived need. This means that, for as long as communications don’t usefully exist, there is no visible demand for them. Supply, however, creates demand.

Let me repeat that, because the concept doesn’t always make sense at first. Demand for communications will stay flat for as long as supply remains below a certain level. Put plainly: there’s no point in talking if no one can hear you.

But the other half of this equation is even more interesting: The more you invest in communications, the more you use them. The more you use them, the more you need them. The more you need them, the more you invest.

When I first arrived in 2003, my job was to improve ICT capacity at the grassroots level. As part of that work, I toured around the NGOs operating in Port Vila. Almost every time, I found the same thing. A single computer had Internet access. It was used intermittently to check a single email account, which nobody really used because… well, nobody used it.

Computer problems were rampant, but nobody got too fussed about them, because… well, nobody relied on them. PCs weren’t much more than glorified typewriters. People printed everything out, so if the drive went to hardware heaven, nothing was really lost.

At that time, Internet was really too expensive to use at all. This was because the service was being sold by the minute. Whether it was intended to or not, the pricing effectively discouraged demand, thereby reducing revenues and inhibiting investment.

But some time in 2003, TVL announced a flat-rate dial-up scheme. Once that product became available, it was possible to create small office networks with shared access to the Internet. Staff were given individual email addresses, and before long, if the Internet connection dropped for more than half an hour, I’d get a half-dozen irate calls asking me what was going on.

If I could go back in time to 2001 and tell NGO directors that they would be doing the majority of their work online, that Internet-based communication was going to be one of the critical factors to the success of their work, they would have laughed at me. (In fairness, some would still do so today, albeit far fewer than before, but the number dwindles with each passing year.)

So there it is – people need technology because people use technology. The more uses we find for the network, they more useful it becomes, and the more we use it. The more we use it, the more uses we find for it, and the more useful it becomes. The cycle continues, spiraling outward with no end in sight. This is known as the Network Effect.

It’s possible to accept this as an academic premise, but understanding what Network Effects really look like can be quite another thing. The story at the beginning of this article is just one tiny manifestation of how networks grow, and how they integrate themselves into our lives. There are as many permutations of this story as there are people willing to give it a moment’s thought. Happily, one person’s dream doesn’t preclude anyone else’s.

Unless, of course, the vision doesn’t allow for growth. When asked to forecast growth and capacity in markets such as Vanuatu’s, many analysts will simply plot a linear curve that shows a slow but steady increase based on previous trends. The problem is: they’re right. Or they will be, if we listen to them.

You see, it’s a self-fulfilling prophecy. If you act on the assumption that nobody will use a network, then – surprise surprise – nobody will. But it works the other way as well. If you simply build out the network, trusting that people will use it… well, they will. What for? It’s impossible to say for sure. My guess is that it will dovetail itself into normal life, more or less as described above. But honestly, the only way to be sure is to roll out the network first, then wait and see.

This kind of advice is, unfortunately, the worst kind of absurdity to planners, donors and business people alike. There’s really only one argument for it, and that is: It Works.

Network effects have been demonstrated time and again, both in academic and business studies. It’s a well-understood phenomenon that has gained acceptance among such technology leaders as Microsoft, Yahoo! and Google. It can be argued that Bill Gates earned his billions because he understood network effects before most others ever did.

So where does Vanuatu stand with regard to this? The truth is, it appears to be teetering on the cusp of a commitment to this kind of growth. Whether our leaders will ultimately commit to investment on the scale required for network effects to be felt remains to be seen.

If we don’t, nobody will notice the difference. Life will continue more or less as it did before. Incremental improvements will trickle out. They’ll stay intact for as long as someone cares about them, or until the donor money runs out. Then they’ll break down like they always do, and we’ll start again.

Or we can leap.