Anthony J. Pennings, PhD

WRITINGS ON DIGITAL ECONOMICS, ENERGY STRATEGIES, AND GLOBAL COMMUNICATIONS

Viral Marketing and Network Effects

Posted on | April 4, 2011 | No Comments

Hotmail was one of the first companies to capitalize on network effects when founders Sabeer Bhatia and Jack Smith began to offer web-based free email hotmails accounts in the summer of 1996. Previously, people would access their email accounts by logging into their email accounts through a PC or mainframe terminal at a university, corporation, or ISP. Using Hypertext Markup Language or HTML (“HoTMaiL”), a web-based service was created where a person could access their email account from any web browser connected to the Internet. What was also extraordinary about Hotmail was the growth strategy they adopted to get new users to sign up.

The idea came from Tim Draper, a venture capitalist who first wanted “P.S. I love you. Get your free Web-based email at Hotmail” at the bottom of every email message. After a rigorous debate, the company dropped the “P.S. I love you”, but they added Hotmail’s URL so the email message’s recipient could click on the link and go directly to the website where they could sign up for a free account with 2 MB of storage. In six months, they had a million registered users. When it was sold to Microsoft for $400 million in December of 1997, it boasted 8.5 million subscribers and as part of the MSN grew to 30 million by mid-1999. Something extraordinary had happened.

It was about the time of the Hotmail sale, when Steve Jurvetson began to write about some of the unique characteristics of Internet companies. Netscape asked him to write about some companies for their corporate newsletter called “The M-Files.” Draper had a particular interest in companies that were using their browser in unique ways. Brainstorming with Draper, they came up with the term “viral marketing” after rejecting terms like “geometric marketing,” and “tornado marketing.” As Eric Ransdell wrote, Jurvetson began to peruse his psychiatrist wife Karla’s medical books. He was drawn to the idea of the sneeze as a way to examine the dynamics of viral activity. A sneeze can spew out millions of items, and infectious particles like viruses can spread to many people if it is done in a crowd. The Internet provides the crowd and the right viral message can “infect” millions of people. Ransdell writes:

    Suddenly, the principle behind viral marketing seemed so easy to understand. In this new world, companies don’t sell to their customers. Current customers sell to future customers. In exchange for a free service, customers agree to proselytize the service. Because recipients of Hotmail messages are almost always friends, relatives, or business acquaintances of the sender, the marketing message is that much more powerful. Each email carries an implied endorsement by someone who the recipient knows.

Google drew on the Hotmail experience for Gmail but took a somewhat different tack. Starting in 2004, it began beta-testing its advertising-supported web-based free browser. Their strategy also drew on network Gmail logoeffects although they added an aura of exclusivity, partly because of the beta-nature of their product. Instead of just getting a Gmail account, new subscribers had to be invited.

Statistics on email are hard to find and somewhat unreliable but starting with the 1,000 or so initial invitees in March of 2004 Gmail has become one of the top four web-based email clients with Windows Live Hotmail and AOL Mail following leader Yahoo! Mail which has over 270 million subscribers. Microsoft’s Outlook (renamed Windows Mail) was the most used email client until the popularity of Apple’s iPhone and iPad email capabilities. While Windows Live Hotmail probably still has more subscribers, Gmail has proved its value in the US based on Internet usage.

While the viral phenomenon is about rapid diffusion, network effects is about value. Network effects has been another main driver of web-based services and businesses. The ubiquity of the Internet has made it extremely valuable for all involved. With that type of connectivity, new viral strategies are being implemented to capture the value of the network effects on the web and other digital devices. I’m looking forward to Igor Shoifot’s new book on viral marketing. He promises us at least 101 reasons to buy it.


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AnthonybwAnthony J. Pennings, PhD is the Professor at the Department of Technology and Society at SUNY Korea. Previously, he taught at St. Edwards University in Austin, Texas and was on the faculty of New York University from 2002-2012. He also taught at Victoria University in Wellington, New Zealand and was a Fellow at the East-West Center in Honolulu, Hawaii during the 1990s.

Category: media strategies, mobile technologies, social media, strategic communications, technologies of meaning
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    Professor at State University of New York (SUNY) Korea since 2016. Moved to Austin, Texas in August 2012 to join the Digital Media Management program at St. Edwards University. Spent the previous decade on the faculty at New York University teaching and researching information systems, digital economics, and strategic communications.

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