# Network Effects ## The Idea in Brief A product has network effects when it becomes more valuable as more people use it. The telephone is useless if you're the only one with one; invaluable when everyone has one. Network effects create winner-take-most dynamics—once a network reaches critical mass, it becomes nearly impossible to displace. --- ## Key Concepts ### Direct vs Indirect Network Effects **Direct network effects:** Value increases because more people use the same product. More people on a phone network = more people you can call. More people on Facebook = more friends to connect with. **Indirect network effects:** Value increases because more people attract complementary products. More iPhone users = more developers building iOS apps = more valuable to be an iPhone user. Platforms often exhibit indirect effects. ### Critical Mass and Tipping Points Networks need minimum adoption to be useful. Below critical mass, they struggle—no one joins because no one's there. Above critical mass, growth becomes self-reinforcing—people join because everyone's there. The challenge is getting from zero to critical mass. ### Winner-Take-Most Dynamics Strong network effects tend toward monopoly or oligopoly. Why use the second-biggest social network? The value is where the people are. This creates power-law distributions: one dominant player, a distant second, then everyone else fighting for scraps. ### Lock-In and Switching Costs Network effects create lock-in. Leaving means losing access to the network—your contacts, your content, your connections. Even if a competitor is technically superior, the switching cost of abandoning your network is prohibitive. ### Local vs Global Networks Some networks are local: your value comes from connections nearby (ride-sharing, local marketplaces). Others are global: value comes from total network size (software platforms). Local networks are more vulnerable to competition because challengers can win geography by geography. --- ## Implications **In strategy:** If your business can create network effects, prioritise growth over monetisation early. Reach critical mass first; extract value later. Subsidise early users to get the flywheel spinning. **In competition:** Attacking an established network is extremely hard. You need a wedge—a niche where you can reach critical mass before expanding. Or you need a technology shift that resets network formation. **In valuation:** Network-effect businesses are non-linear. Value per user increases as users increase. This justifies high valuations for early-stage networks that have hit critical mass. **In platform strategy:** Two-sided platforms (marketplaces, app stores) have network effects on both sides. More buyers attract more sellers; more sellers attract more buyers. Solve the chicken-and-egg problem by subsidising one side initially. --- ## Sources - [[7 Powers]] — Network Economies as one of the seven sources of durable competitive advantage - [[Linked]] — Barabási's science of networks; hubs, preferential attachment, and power-law distributions - [[Making Sense of Chaos]] — Network effects in economic systems; complexity economics - [[The Formula]] — How network position determines success; the science behind network dynamics