Planners should adopt network externalities to drive growth

Not to be outdone, she went on in her treatise to describe how predictions of traditional rain makers, who most Africans believed could woo rain clouds, had no correlation with weather patterns.

What the settler did not realise at the time was that she was facing a less developed form of what is referred to in technology today as network externalities.

Network externalities occur where the value of a product increases along with the number of people using it.

At the time, rain makers were extremely popular as the information they provided was used by most Africans in decision making, planning and stimulating what we refer to today as discussion forums.

Charge premium

In our latter day example of technology driven network externalities, we are aware that the most successful telecommunication networks have the largest network externalities and as a result are able to charge a premium for some of their services. Take the example of contests being run by some lotteries.

Despite prize money at stake being in the millions of shillings, the pricing for text communication or voice calls from contestants to participate is at a significant premium.

While some may perceive this pricing as extortionist, others will justify it by indicating that that is the price one has to pay for gambling.

The network externalities that the traditional rain makers leveraged were driven primarily by word of mouth.

In this day and age, technology has enabled the rapid creation of network externalities that can be used to drive profitable business models.

A modern example is Skype, which allows users to make telephone calls over the internet to other Skype users free of charge.

Technology pundits estimate that Skype has an online community of over 250 million people from almost every part of the globe.

Skype has evolved from being a platform used by technology early adopters to a platform used by established organisations to communicate across their operations around the world.

Online social networks such as Facebook and Twitter work in much the same way.

Network externalities do not always have a positive effect. In some instances, network effects can be negative.

The traffic congestion in Nairobi is a classic example of a negative network externality.

The more users there are on the highway network, the greater the congestion and negative experience.

The same negative network effect can be applied in the case of bandwidth.

Increasing competition for bandwidth by end users on a telco or ISP network results in a negative experience for subscribers.

Negative network externalities also occur in situations where there is provider complacency.

For a very long time, we relied on a monopolistic telecommunications service provider which invariably resulted in poor and over priced services.

Resources to service their network were restricted and price increases were implemented in an arbitrary manner that was not in the best interest of subscribers.

For upcoming local entrepreneurs, particularly in the ICT sector, their challenge will be to create technology products that can increase in value through the positive effects of network externalities.

Positive externality

They can borrow a leaf from Microsoft which created a word processor that became a standard across the world.

We have our own local examples of mobile money transfer platforms that have increased in value significantly due to the effects of positive network externalities.

With more people using platforms like M-Pesa, the value to end users increases as they are able to transfer or receive funds from a larger number of associates.

It is within this context that planners in public institutions need to think about leveraging the concept of network externalities to drive development agenda.

In Ukambani, beekeepers get honey from beehives. The bees also pollinate crops of farmers with properties in the vicinity.

The positive externality here is that farmers get their crops pollinated as a result of honey-making.