Google, Facebook, Amazon and Ebay have grown to massive online companies. The network effects of these companies might affect the trend of innovation amongst internet start ups for years to come.

Amazon buys Book Depository, Ebay buys Magneto. Google, Facebook and Yelp start Groupon style deals websites. Google starts Google +. All in 2011 and all in my short term memory.

All you need to do is read Techcrunch and within no time you’ll see many more stories along these lines. But so what right? Big Companies have been buying small companies and copying the ideas of others for hundreds of years.

A history of Internet Mergers

Since the Internet began its meteoric rise in the late nineties, plenty of Internet Companies have been bought and sold. It probably started with big non-internet companies buying successful Internet companies at massive premiums to try and get in the game (think AOL / Time Warner and Myspace / News Corporation). That didn’t turn out too well for the buyers but thankfully a few guys are most likely downing Caipirinhas on some Brazilian island thinking of Rupert Murdoch.

Somewhere along the line, Internet companies began buying each other or competing directly for the top spot. Think of the search engine race; Yahoo, Google, Askjeeves, Lycos, Metacrawler (click here to see where they are now). No prize for whoever guesses the winner of that battle.

Friendster, Myspace, and Facebook…. I could put a “click here to login to Facebook” button to show who won that one.

For a more complete look at the online landscape of buyouts and mergers see this brilliant mashable post.

Network Effects Emerge

However, until the last few years, I couldn’t have confidently said very many Internet companies had won their respective battles (though I could have predicted some were likely to win – Google, Amazon, Skype and eBay come to mind).

It is true that these companies will still have to hold their position due to the very low switching costs online. But, the winners of the Internet game (so far) have grown to sizes where another factor really starts coming into play. That factor is Network Effects.

Network effects increase the value of a product or service as more people use it. They create barriers to entry for competitors looking to break into the space. And finally they provide a platform for these massive companies to break into new markets.

How the Internet Landscape could change

Seeing the very fast movements that great start up ideas can make on the Internet has interested and inspired me for years. Think Google Maps, Facebook, Tripadvisor, Airbnb, Groupon, online travel booking, Evernote, Twitter, Kickstarter. If you don’t know any of them, Google them. The speed at which good ideas have been able to get going has also increased as the Internet has grown older.

But now that Google, Amazon, Ebay and Facebook (amongst others) have grown to the sizes that they have, they have the customers, cash flow and technological edge to run the show unless start ups really put up a fight (that they may be unable to win). They could emulate most of the ideas above if they wanted to and then expand them onto their network of users.

5 Theories about Innovation Online

When Amazon recently bought Book Depository, I was genuinely a little annoyed. Book Depository had a completely different business model by offering free delivery worldwide and cheaper books. They also didn’t ream Australians for living far from the US. Now that Amazon owns them, this may still continue but only if Amazon allows it to. Whilst the Depository family might be on an island spending the purchase price (and good on them), this example shows the extent of Amazon’s power. And with little in the way of a multinational anti-competition organisation, who will stop them?

Theory 1 – If you do something interesting online and want your idea to go to completion, you’ll may have to withstand the forces of multimillion dollar offers to get it there.

Theory 2 – The Internet superstars can set the course for a large proportion of online innovation.

Facebook deals, Google offers are both direct copies of Groupon’s business model (which is probably a direct copy of someone else). Thankfully for the social networking giants, copyright protects the form and not the idea.

So if you’re a start up with ideas in the making, do it knowing that if one of them does take off, it is now very simple for Facebook or Google to copy the idea, maybe do it better and then launch it to a worldwide audience. If you’ve managed to grow a start up that has 10,000 users and $1M a year in revenue, your idea could be worth massive multiples of this to a company like Google or Facebook.

Theory 3 – If you have a start up idea that is likely to succeed, consider your launch plan carefully.

Theory 4 – It is perhaps easier and cheaper for them to simply copy your idea and trial it on their network than to buy your company.

Theory 5 – Your idea is worth more to them than it is to you. If you’re going to sell, don’t sell cheaply.

As an aside, I’m not certain any of these theories are anything but adaptations of ideas already visible in the real world. But I do feel that there are very few ideas that a company like Google or Facebook couldn’t go after online.