The Yammer Factor: Network-Effect and Stickiness vs. IP

16 Jul

Microsoft’s acquisition of Yammer has dominated the enterprise software news in the last few weeks. Almost unanimously, people have been surprised about the astonishing $1.2B that the Redmon giant was able to pay for a startup that offered a relatively simple solution that has produced less than $20M in revenue. Arguably, Microsoft would have been able to build 10 Yammers with that amount of money. However, by thinking that way we are overlooking the most important assets that Yammer, as a product, brings to the table and that is something Microsoft couldn’t simply build: we are referring to its network-effect and stickiness.

Intellectual property (IP) differentiation has been one of the hallmarks of the growth of enterprise software startups in the last 20 years. In the enterprise world, IT organizations has been well known for acquiring software based on specific IP value that sets it apart from the competition. As an enterprise software startup, having a unique IP was the easiest way to get the attention of customers. Additionally, every single enterprise software marketing  in the late 90ts early 2000s was intended to emphasize how a specific software was the only viable solution to an enterprise problem based on the unique algorithms or techniques it provided.

Contrary to the enterprise market, the consumer technology ecosystem didn’t rely so much on unique IP as the fundamental engine of growth of startups. Other factors such as the ability of ubiquitously acquire customer and convert those customers into regular and long term users of your product were more relevant when evaluating the viability of a consumer market technology.

During recent years, the enterprise software industry has started to embraced the principles of the consumer market and drastically shifted from being and IP centric business to acquire software based on other elements such as simplicity, easy delivery etc. As a result, you can see how most widely successful modern enterprise software startups rarely focus on offering a unique IP and, instead, emphasize on factors that facilitate the easy acquisition and adoption of their software. From those elements, there are two that have been central to the core DNA of any successful software startup in the last few years: network-effect and stickiness.

By network-effect we refer to the characteristic that facilitates users or your product to acquire new users. Complimentary, successful enterprise software product have the ability of evolve into a vital piece of an organization once they are adopted by a few users: we refer to this factory as stickiness.

The reason why network-effect and stickiness are becoming increasingly more important than unique IP is because they facilitate a scalable and natural way to acquire long-term customers. In the world of the mobile, cloud and social enterprise, network-effect and stickiness are, in a lot of scenarios, better indicators of the potential success of an enterprise software product than unique IP.

If you think about the recent generation of successful software startups, you will quickly notice the network effect and stickiness elements embedded into every aspect of their products. Similarly, these companies will hardly market IP elements that make their product unique compared to the competition. In an enterprise world desperately driving towards consumerized models, the ability of transforming customers into sellers and becoming a key part of their everyday life is largely more important than providing a patented solution to a problem.

What do you think? Are network-effect and stickiness more important than unique IP in the enterprise software world?

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Posted by on July 16, 2012 in Uncategorized


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