Network Effects and the Value of User Generated Content
Professor and Senior Associate Dean of Programs
Scheller College of Business, Georgia Institute of Technology
Friday, November 3, 2017
10:30 AM – 12:00 PM
Speakman Hall Suite 200
The primary product of many internet firms is their website that generates revenue through advertising, subscription or referral fees. Sky-high valuations of these firms have generated significant interest, debate, and even euphoria among investors and entrepreneurs. Network effects provide the underlying logic behind these high valuations – the idea that the value of participation for an individual user increases exponentially as more users actively participate. Thus, many firms initially focus on generating usage, with the expectation of high revenues and profits later, a premise that is fraught with uncertainty. These firms often rely on a wide variety of user-generated content to attract users to their websites. In this paper, we argue that the type of content on the website affects switching costs for the user and plays an important role in the value of internet firms since high current usage may not translate into future revenue and profits when switching costs are low. We use a grounded approach to classify websites into firm generated content, user contributed content and interaction websites. We collect data about the valuation, traffic and other parameters of such websites from several sources. We argue that interaction websites that provide a platform for interactions between social or interest groups create switching costs for the user more than other types of websites and we demonstrate empirically that network effects in firm value are stronger for interaction websites. Our results indicate that user-generated content has a greater value when created through interactions within social groups. We also demonstrate that the signal of firm quality through venture capital funding has a greater effect on firm value for websites that are based on user-generated rather than firm-generated content because of the inherent uncertainty associated with monetizing user-generated content.