We are all familiar with the traditional definition of network effects, but if you are not, here is a quick reminder. According to Banton (2024), network effects occur when the value of a product or service grows when an increased number of people make use of it. Network effects can play a significant role in the growth of products and services. For example, think of how much value OpenAI created when it reached over 100 million users within two months for its newly developed ChatGPT application (Milmo, 2023). However, Generative AI services, such as ChatGPT, are subjected to a new form of network effects. A distinct network effect that could be even more beneficial to Generative AI.
Generative AI tools grow value by providing accurate answers to the queries they are being asked. As Generative AI tools depend on the inflow of large customer data sets to work effectively, they use customer feedback to enhance their answers. The value of the systems, therefore, depends on the data that is provided by users. The ability to provide enhanced answers and suggestions based on user feedback introduces a new network effect: data network effects. Data network effects similar to traditional network effects, but rather focus on the technological value users provide. Let me explain! Through reinforcement learning, Generative AI tools can use customer feedback on queries to increase their intelligence. Higher intelligence results in more accurate answers and suggestions, making it more attractive for new users. More users lead to more responses, resulting in even higher accuracy and a circular development of the Generative AI tool (Levine, 2023).
By explaining how data network effects work, managers can understand its impact on future applications. However, the discovery and effects of data network effects has just started!
References:
Banton, C. (2024, 22 augustus). What Is the Network Effect? Investopedia. https://www.investopedia.com/terms/n/network-effect.asp
Milmo, D. (2023, 3 februari). ChatGPT reaches 100 million users two months after launch. The Guardian. https://www.theguardian.com/technology/2023/feb/02/chatgpt-100-million-users-open-ai-fastest-growing-app
Levine, S. S. (2023, 16 maart). How network effects make AI Smarter. Harvard Business Review. https://hbr.org/2023/03/how-network-effects-make-ai-smarter
