Network Effects

One of the more important economic principles that affects MMOs is called “network effects.” Network effects cause some goods to become more valuable as more people have them. The first fax machine, for example, cost a heck of a lot but had exactly zero value because no one else had one. To whom are you going to fax anything? The value you get from buying a fax machine is being able to interact with all those other fax machines out there.

In online games, the same effect applies to players. The more players there are, the more you can play with. Being the only person at an online poker site is pointless. Being on an underpopulated server means that you cannot get a full group going. Playing during off-hours means the same thing, as does playing a game where you don’t really speak the language.

Products with large network effects either have standardization that facilitates multiple entries or else tend towards market concentration on one winner. Did someone say WoW?

As an example of that first one, think fax machines. It does not matter what sort of fax machine you buy, because they all work together. If you make a website, it does not matter what program you use to do that, from Dreamweaver to Notepad, because it is all HTML. The adoption of one standard allows everyone to join under it. We have one format for VHS and for DVDs; Betamax lost, and we will see what happens with Blue-Ray and HD-DVD.

As an example of market concentration, think Microsoft. You use Microsoft Office because everyone else does, so you can share documents. This is why Adobe gives away Adobe Acrobat Reader: everyone can read Acrobat documents, so it is always safe to make your documents PDFs. Do you want to have six instant messaging programs running at once, or do you just run AIM (Trillian gets around much of that, potentially returning this to the fax machine example)?

And now back to online games. Do you want to play on the underpopulated server? There are some games that are perversely designed to work worse as more people play them, and sometimes you just want to get away from the idiots, but most of us want more people around. Even if you solo, that shared experience is often worth something to you (or else you would play a single player game). Do you want to play a dying game? Who wants to be the last rat on a sinking ship?

The more popular a game is, the more popular it can become. There are more web sites about it, and more of your friends are talking about it. You want your friends to play with you, so you are a viral marketer. Asheron’s Call had a great idea for this, because new characters could pass experience to older characters who serve as patrons. Recruit your friends to level faster!

To me, those friends are the most important part of the network effects. People leave and join games in clusters. You went to EQ2 or WoW because you and fifteen guys from your guild all decided to do so together. You worked out in advance which server you were going to. You were sticking with your friends. You stay or go as a team, because the greatest value of the game is those people.

This leads to a related effect called “lock-in.” Once the network is established, breaking it is hard. If you were to put out a DVD now with a different format, you would face a huge barrier in getting anyone to buy it because they would need to buy something else to be able to use it. Try selling a non-qwerty keyboard; you can sell a few Dvoraks, but we all know how to use this one.

To beat lock-in, you cannot just be a little better. You need to be a lot better. DVDs are much better than VHS. USB thumb drives are much better than floppy disks.

To convince people to play your new game, you must be much better than the game you are trying to kill (or else draw entirely new people to MMOs). You must make it worthwhile to switch, either to leave behind an entire guild and several level-capped characters or to get all of them to switch games at once. Every time I have left a game, I have left behind huge amounts of value and nostalgia, characters that may have been deleted by now.

In comments on the Median Gamer Theorem, xwn comments:

Thinking about Warhammer Online – if EQ2 is more on the PvE side of things, and WAR more on the PvP side – that leaves WoW in the middle, doesn’t it? Sounds like a good opportunity to verify your theory ;)

Well, Warhammer Online better be really really good if it wants to draw away a large chunk of the WoW crowd. Of course, WoW will be several years old by then, and maybe many people will be tired of it and hankering for something new.

This is a problem with “evolutionary” games generally. You can be objectively better than the market leader in every way, but if you are not enough better to overcome lock-in, it does not matter. You are not competing with WoW; you are competing with WoW and a year of history, accumulation, grind progress, guild-building, etc. Hey, let a thousand flowers bloom, best of luck to Vanguard and Crusade, I welcome all new entrants. But you need to bring us something really special if you are going to make a mark.

: Zubon

3 thoughts on “Network Effects”

  1. Amen and well said. I’ve posted about similar thoughts recently. As ready as I am to kiss Blizzard goodbye, I have no intention of building new toons, relationships and experience in a game that is only marginally better. It’s too much work and you’re leaving a lot behind you. I really hope that Vanguard, Crusade and Spellborn live up to the hype so I can jump on to another ship.

  2. I think that USB drives didn’t really become popular until it was clear that the last multiwrite format was dead. It wasn’t so much that everyone had USB drives or USB ports – by 1999, everyone did – or even the creation of cost-effective “on the go” digital devices (such as the MP3 player/iPod which really sparked the need for such a device).

    The Flextra, for example, was incredibly better than floppy disks (~ 20 megabytes and ~ 40 megabytes) and came ten years earlier than USB drives. Even better, the drives could read from and to 3.5 floppies. But no one needed to 20 megabytes of movable data in 1988. That’s an eternity of data.

    The MiniDisk, on the other hand, remained better than CDs and Floppy disks due to the high possible storage size, maximum rewriteability, and techniques standard to the system being very effective for decreasing power draw. They and their devices were also quite close to invulnerable, particularly compared to the CD or Floppy disks of the time. They came out in 1992, about the same time CD-Rs were really beginning to hit the markets.
    Why did they fail? They cost a shit-load, and not because of actual product costs, but because Sony kept them locked to a very small segment of producers.

    It was the ease of creation – no cost but design and physical – demand, and the death of the nearest comparable media, floppy disks, that really made it worthwhile.

    It’s a little different for MMOs, largely because there’s the added issue of non-transferable and transformable value. You can’t get that +4 Vorpal Sword in City Of Heroes, nor your level 60 cow Tauren hamburger Druid. On the other hand, you end up with a character e-bayable for an entirely obscene value, and that value will only drop as the game’s popularity (perceived or real) begins to drop.

    I think the end result is that truly hardcore gamers aren’t really likely to leave to a new game unless it’s either really, really good, or someone they know migrates. But the much larger group of middle gamers, who are likely to hit the cap and ‘beat’ the game over summer or Christmas, have additional reason to switch when push comes to shove.

  3. Mind you I’m not sure the next big thing needs to drag millions away from WoW. As you say it’s getting on a bit and many like myself have finally kicked the habit and left behind the guilds and the level cap characters as we rediscover RL.
    That’s not to say that if something down the line offers a quality experience with something new to attract me back to MMOs then I wouldn’t be happy to give the product a go and get sucked in all over again.
    Sounds like fun to me, just noone has yet done it.

Comments are closed.