The return of niche
In the new podcast series for Trajectory Africa, I told Tayo that winners would find in crevices versus large, open mass markets. What does that really mean?
In the last 25 years, the Internet economy has followed the trail of globalised value chains in almost every country. ‘Made in China’ was the industrial call sign of industrial globalisation. Facebook, Google, and some other companies were the digital equivalent. All of them rode the surf as prime examples of Network Effects. But that era is fading into grey.
Instead of the global network effect-powered startup, sufficiently local champions are taking the stage. By local champions, I don’t mean “geographically local”. Localisation can happen in niches across borders. In other words, the age of the versatile platform is winding down, and we’re returning to niches. More importantly, thanks to the growing open technology and “ecosystem platform” movement, many will share the stage with peers.
When you ride a surf, the natural wave phenomenon does the heavy lifting. It is the same in the digital world of software. One way to think about network effects is as the technical name for riding social waves. The Network Effect theory was born at full-term in the 1990s. Just as the dot-com boom and the explosion of software that followed soon after entered mainstream consciousness. In a 1985 paper, two academics (Michael Katz and Carl Shapiro) at the University of California, Berkeley, described network effects as “products for which the utility that a user derives from consumption of the good increases with the number of other agents consuming the good.”1 This description and the entire paper—one of the earliest works published on the subject—was the sweeping definition the tech industry adopted.
So, in the next decade following the dot.com boom-bust, the network effect theory became a resident principle for tech people and their investors as venture capital started another excellent run—the one that gave birth to the class of Facebook and Uber. Synonyms like “Trending at #1”, “Going viral”, etc. entered business dictionaries. New metrics that tried to capture how much network effect a software product could demonstrate in ever-shortening time cycles followed.
However, since you will not likely create another enduring popular social media app, business customers dread products with forced lock-in. The user-side appeal of being part of a network effect-driven platform is losing its shine. We’ve seen this in how informal traders switch from B2B supplier to B2B supplier while keeping their regular offline supply chain partners. The hundreds of millions investors poured into these novel approaches to supply credit, harness data, and build moats did not just work.
Like commerce, many sectors in Africa are similarly resistant to engineering network effects because, like arguments on Twitter, network effects in Africa tend to have short life spans.
What does this mean for Africa, where “scale” is not very well defined? The short version is that it means the value from simply growing “networks”, as measured by exponential user growth, will retreat broadly but not entirely. So, the best networks will be smaller, tighter and incredibly valuable.
Two things are apparent to me, and there may be more. The first is that sufficiently balanced niche products will find their advantage over generic hype brands that want to engineer network effects. In other words, network effects will become more local. That may be geographically local, localised to industries, or tailored for specific use cases regardless of different users. The second is that Other Effects will become even more critical. Think of Other Effects as underlying currents that may only be obvious to the casual observer once they become large waves.
The summary is that the route to critical mass will increasingly come from something other than riding the hype wave to more users but from giving fast value to quality users. What we now interpret as part of the fallout from falling valuations and hard-to-find venture funding is really just necessary medicine. And as we understand route-to-quality markets better, I more than suspect we will ditch more go-to-market playbooks.
Michael L. Katz, Carl Shapiro, The American Economic Review, Vol. 75, No. 3 (Jun., 1985), pp. 424-440 (17 pages), Available at https://www.jstor.org/stable/1814809