What's more powerful than the net effect?

By Bill Burnham Unfortunately, just as exchange mania is reaching its peak, new companies are threatening to undermine the long-termvalue of exchanges by decreasing the network effect. How are they doing this?

By Bill Burnham

Unfortunately, just as exchange mania is reaching its peak, new companies are threatening to undermine the long-term value of exchanges by decreasing the network effect.

How are they doing this? By creating, for lack of better word, "meta networks." Meta networks are networks of networks and they enable Internet users to access numerous exchanges at the same time.

When users have such a consolidated view of all the possible exchanges within a particular market, the value of any single market decreases dramatically.

Just look at eBay. Lots of companies including Yahoo (Nasdaq: YHOO) and Amazon (Nasdaq: AMZN) have tried to take on eBay with little to show for their efforts. Buyers and sellers won't try new auction sites when eBay gives them the greatest chance of completing a transaction.

Recently however, a large number of meta networks have sprung up. These networks allow both buyers and sellers to go to one place and have access to all of the different auction sites. On the buyer side, sites like AuctionWatch and Bidders Edge enable buyers to search and monitor listings across all the major auction sites. At the same time, on the seller side, sites such as Andale are enabling sellers to post and monitor their listings across multiple sites.

EBay is so concerned about these meta networks that it's suing some of them, demanding that they pay fees to access eBay's database of listings. EBay may control database access in the short term, meta networks are gradually removing the auction giant from direct contact with its customers. EBay is turning into one of many databases, decreasing customer loyalty and putting pressure on fees.

Meta networks are pulling apart existing exchanges by using the inherently distributed nature of the Internet. Indeed programs such as Napster, which is essentially a meta network for MP3 file sharing, demonstrate how powerful meta networks can become.

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