Why A Lack of Network Effects Killed The Color App

Modern Monopolies by Applico CEO Alex Moazed and Head of Platform Nicholas L. Johnson was published in May of 2016 by Macmillan. We previewed one of the many platform success and failure stories featured in the book. These stories illustrate best practices and mistakes to avoid when building a platform business. This article focuses on Color and how a lack of network effects can kill a platform business.

“People say it all the time: this product is so good that it sells itself. This is almost never true. These people are lying, either to themselves, to others, or both.” -Peter Thiel

“Every 10 years or so a company and a marketplace and an opportunity come together that’s transformative. Not since Google have we seen this.” That’s how legendary venture capital firm Sequoia Capital reacted back in 2011 when it saw Color, a photo-sharing platform started by serial entrepreneur Bill Nguyen. “No other app connects people like Color does,” Sequoia Capital partner Douglas Leone said. It was “an instant social network” that captured “experiences with those around you.” The platform had founders with impressive resumes and the ambitious goal of being “the Facebook of the smartphone era.” Silicon Valley investors were foaming at the mouth. They didn’t want to miss the Next Big Thing. Unlike Facebook, Color didn’t require a username or password to use. There was no “friending” or “following” on Color. Instead, photos taken by other Color users within 150 feet would automatically appear in what the company called an “elastic network,” essentially a stream of photos that would change depending on where you were. The goal was to create a social network of people you didn’t know, rather than ones you did. “I do think Facebook is broken,” Nguyen said at the time. Color would do what Facebook could not. The platform “intelligently identifies nearby smartphones, whether at a local park or at a concert, using advanced proximity algorithms” and instantly shares photos, videos, comments and likes with them. Nguyen claimed that Color could ingest and analyze four times the amount of data that Google could in its early days. Armed with this ambitious vision and a host of patents for the sophisticated-sounding technology designed by former LinkedIn chief scientist DJ Patil, Color raised $41 million. Nguyen dropped $350,000 for the URL Color.com and another $75,000 on colour.com. The company garnered serious media attention, included profiles by USA Today and CNN. There was just one catch: Color hadn’t launched yet.

The platform launched its iOS app on March 24, 2011, bizarrely choosing to go live a few days after uber tech conference SXSW ended, rather than before. (Twitter had famously launched its platform at SXSW in 2007 to great success.) What the Color app looked like when it launched in 2011 Thanks in part to the massive hype and widespread publicity, the app rocketed to #2 in the App Store charts, the David to #1 app Facebook’s Goliath. But Color had a problem. “Within 30 minutes I realized, Oh my God, it’s broken. Holy shit, we totally fucked up,” Nguyen said.

The $41 Million Mistake

“What if you threw a $41 million party and nobody came?” That’s how the New York Times began a June 2011 article on risky investments in tech startups. The app in question was, of course, Color. Color’s problem was really simple: if other people weren’t using the app, the platform sucked. The app quickly was flooded with one- and two-star reviews in the App Store, most of which had a similar complaint. “First-time experience is terrible: it’s totally blank. There’s nothing to see,” one user wrote. “It would be pointless even if I managed to understand how it works,” another said. For most of the people who downloaded the app, the platform was a ghost town. The platform didn’t solve its chicken and egg problem. All of Color’s technological wizardry and its “elastic network” showed them nothing. Because of its 150-foot proximity limit, the platform was useless outside of densely packed tech meccas like San Francisco or New York. In order to get any value out of Color, you needed lots of other people nearby to be uploading photos. But with few people uploading photos at the start, new users had no incentive to stick around and upload photos. The app featured “ephemeral” photos (a feature Snapchat would later popularize), which meant that any existing photographs would disappear after 24 hours. The company tried to respond quickly. It put up a warning on its home page: “Don’t use Color alone!” Nguyen eventually tried updating the app to relax the 150-foot limit in areas that weren’t densely populated, but to no avail. Color became a tech-industry punch line. “Extremely-Hyped Startup Fails to Live Up to Extreme Hype” one headline joked. “I wanna see that pitch deck,” influential tech blogger Robert Scoble wrote. “It must have had some magic unicorn dust sprinkled on it.” The app quickly fell back down the App Store charts and faded back into obscurity. After a failed attempt to pivot into being (ironically) a Facebook app, the company eventually shut down, with Apple “acquihiring” its tech team.

Filed under: Platform Innovation | Topics: color, network effects, platforms

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