What are network effects?
Amit Kukreja, the CEO and Founder of Audea, explained to Christian his views on network effect importance for social media applications, Palantir and disruptive innovative companies.
Amit stated how TikTok has one of the greatest algorithms to date, enabling virality and discovery at any moment. This enables organic discovery – regardless of follower count or platform status.
“If Instagram doesn’t go down the organic discovery route, they will be in a little bit of trouble” said Mr Kukreja.
Christian asked Amit, how important network effects are for his investment philosophy – & Amit expressed the overall necessity for network effects to aid an innovative investment within public markets. A network effect is a phenomenon whereby increased numbers of people or participants improve the value of a good or service. Within the context of Palantir, the more data Palantir gains, the better their software solution becomes, and overall, the utility of the platform majorly increases.
When a company gets a network effect, it is actually very hard for the company to get rid of the network effect.
Companies in which have network effects includes, Google, Amazon, Facebook, and Palantir.
Two main types of network effects:
There are two main network effects in which can predict the innovative success of a company:
Indirect network effects occur when the value of a network increases as a result of one type of node benefitting another type of node directly, but not directly benefitting the other nodes of its same type. Within the context of eBay, the addition of a new seller does not directly benefit other sellers. In fact, another seller just means more competition for all the other eBay sellers. However, due to the expanded inventory of goods, this makes the marketplace as a whole more attractive to buyers. Additional sellers end up indirectly benefitting other sellers because of the total increase in potential customers.
OS platform like Microsoft Windows is a good example. New Windows developers do not directly benefit each other, however with an increased library of Windows programs, the number of Windows users will grow. Thereby, a greater number of windows users are beneficial for all developers because it increases the pool of potential customers for their program.
Direct network effects is when the value of the service simply rises in value when the number of users increase. Within the context of a social media platform, this is revealed most clearly. As more members join the platform within your community, this results in more connectivity and interlinking, thereby resulting in more utility of that set platform.
Palantir Governmental Network Effect Importance:
Palantir, a software company that specialises in deriving the most utility from data, experiences major network effects via their commercial and Governmental offerings.
Many analysts and retail investors within Palantir have failed to successfully recognise the true power of network effects within the context of software.
Palantir, via their Governmental offering Gotham, experiences mass-network-effect creation, due to the unique collaborative environment innate within Federal Agencies.
COO Sankar stated within an exclusive call with analysts that, “Governments are unique”, because any network effect created within one agency is then mirrored across all of the other agencies using Palantir’s software solution. This is in comparison to the commercial side of the business in which, is innately competitive, and therefore often organisations do not work in conjunction in such an evident manner.
Palantir also benefits from direct network effects: Whilst Palantir does not store, collect, or own data, the company does process the data. “Each customer on our platform also generates network effects. While each organization’s data and the decisions it informs are unique and owned by them, the insights we gain on how to capture, process, integrate, and leverage data are broadly applicable across other types of organizations. The knowledge and acquired understanding of a customer’s operations — and, more broadly, the entire sector in which that customer operates — are incorporated back into the platform for the benefit of all of our customers across every industry and sector in which we work.”
“This therefore reveals how each new user that uses Palantir’s product generate network effects because, through each new use case, implementation and network effect creation, the lessons learnt when it comes to implementation and insights can be leveraged to other organisations in the future. To add, Palantir within the Government space also generate major network effects. Governments are innately collaborative, meaning that each new use case and network effect within one agency is mirrored and replicated across all other agencies that use Palantir product. In turn, we believe this creates a huge flywheel of network effects that can be leveraged within the context of the commercial space.“
Development Community Importance:
Christian asked Amit how vital the developer community was for Palantir in order to aid growth of the product organically.
“Can you create a community of developers that become evangelists, that therefore can advocate for usage of the product within a set company” said Amit. Through gaining first hand usage of the product, this can aid the ease of friction associated with usage of the product within a company. Furthermore, the development community can aid the gathering of feedback, in which can therefore make the product better.
In order for Palantir to grow business organically, without the necessity for sales and marketing constantly, the use of natural bottom-up growth is vital for success.
Palantir is often deemed as a product in which is hard to understand, or confusing for retail investors & users. This was catalysed by the use of Jim Cramer on CNBC stating that Palantir is a “black-box product”, in which is involved within an array of intelligence operations with the US Governments. The use of the Palantir development community would be vital for demystification of the product as individuals would have an ability to use the product hand-on, resulting in a greater understand of usage and capabilities.
To add, Amit went on to mention the AWS certification program, and how this can aid normalisation of a set solution. This is because, as more developers are certified, organisations can easily recognise those that have skill within a set solution, in turn resulting in greater adoption over time. Within the case of AWS, organisations can recognise easily those whom have experience using AWS, leading to potentially more adoption of the product.
This is in comparison to other solutions in which do not have certification programs. It can be very hard for companies to understand and compute the level of qualification and skill a set employee has, in turn adding more friction to the integration and adoption process.
Palantir normalising their software via a certification program can in turn lead to more adoption over time.
Overall, to conclude there are a few main benefits of the developer community for Palantir:
- Organic growth
- Better understanding of the product
- Greater adoption over time
Palantir within recent times did introduce the Certification Program to their software, in order to scale the platform and to empower customers and partners.
AWS mentioned within a recent report that there were evident benefits of the certification and training programs:
ESG surveyed more than 1,000 learners across the globe who have taken AWS Training courses, earned AWS Certifications, or both, and identified the following benefits of AWS Training and Certification:
- Improved productivity: 84% of learners said AWS Training improved their on-the-job efficiency and 83% reported improved effectiveness. Similarly, 80% said AWS Certifications boosted their efficiency, and 83% reported improved effectiveness.
- Increased operational skills: 85% of learners saw an improvement in their operational skills that far exceeded their expectations as a result of AWS Training and Certification. 90% of learners reported a positive return on investment (ROI) from AWS Training, and 91% reported the same from AWS Certification.
- Greater earning potential and job security: 69% of respondents reported higher earnings as a result of AWS Training, and 74% reported the same as a result of earning AWS Certifications. Additionally, 82% of learners reported increased job security as a result of AWS Training, and 83% reported the same for those who earned AWS Certifications.