I saw this post from Albert Wenger this morning. I generally agree, but I’ve had a thought that’s been brewing that is a bit contrary to his (and the conventional belief) of the winner-take all dynamics of internet network businesses.  It’s true – in businesses with strong network effects, the winners are often much more valuable than the 2nd or 3rd place players.  But I think that the power of this winner-take-all dynamic is over-rated, and I wonder if the winner-take-all-ness of network businesses online may actually be declining.  Couple reasons why:

• We’re seeing more fragmentation of services for more narrow needs.  Horizontal marketplaces should have dominant network effects, but in more and more categories, we’re seeing horizontal networks chopped into small chunks based on more narrow needs or tastes.
• In combination, what I think we are seeing is lower friction to trail for internet services.  Now, I may be informed by my own experience, but the sense I have is that a larger and larger mainstream audience is willing to experiment with new internet services.  I actually think that the bite-sized, app store eco-system may hvae something to do with this, as does mobile, which is creating more fragmentation.  But think of it – while we talk about how dominant the major social gaming services are, you constantly see new entrants surge to the top of the app store.  Draw Something is the most recent example, but there are many examples.
• Not all unstoppable networks are great businesses.  And not all services are sustainable, even with strong network effects.  Anyone use Chatroullete recently? Some web servies hit a nerve, but might just be flashes in the pan.  Others may be sustainable, but I think this momentum investing is over-valuing traction and under-valuing the difficulty of building long-term, sustainable businesses that will keep growing for decades.

** Update: Pascal Gobry wrote a really nice piece a few months back that articulates some similar thoughts. Here it is: http://www.businessinsider.com/network-effects-2011-5