Warren Buffet is famous for identifying the need for businesses to have "moats" and "walls" around their profit-centers to keep competitors out, and data-centric companies often cite their massive collections of user-data as "moats" that benefit from "network effects" to make their businesses good investments.
In a smart, eye-opening essay, Martin Casado and Peter Lauten from the VC firm Andreesen Horowitz dismantle the idea that data benefits from "network effects" and that it presents any kind of "moat" to protect businesses: instead, the VCs demonstrate how collecting data gets more expensive, and less useful, over time.
To understand why, think of Netflix's data-collection, performed in service to its famous recommendation engine, which suggests programs you might enjoy based on the preferences of people who are similar to you. When Netflix is starting out, it needs to develop a "minimum viable corpus" in order to produce recommendations, but once that data is in place, new data produces diminishing returns in recommendations. Going from 100 to 1,000,000 users allows Netflix to dramatically improve its recommendations, but going from 1,000,000 to 1,000,100 (or even 2,000,000) produces very little new benefit.
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