Network effects are one of the most important dynamics in software and marketplace businesses. But they’re often spoken of in a binary way: either you have them, or you don’t. In practice, most companies’ network effects are much more complex, falling along a spectrum of different types and strengths. They’re also dynamic and evolve as...
This post is all about network effects and critical mass. But it’s also about applying those concepts as important mental models in business, so I will share a short story about a business decision I once made that required me to consider network effects. The Internet bubble had popped by 2002, and a lot...
In the furiously competitive world of tech startups, where good entrepreneurs tend to think of comparable ideas around the same time and "hot spaces" get crowded quickly with well-funded hopefuls, competitive moats matter more than ever. Ideally, as your startup scales, you want to not only be able
Centralized planning is no longer required.
In many ways, online marketplaces are the perfect business model. Since they facilitate transactions between independent suppliers and customers rather than take possession of and responsibility for the products or services in question, they have inherently low cost structures and fat gross margins. They are highly defensible once established, owing to network effects. Yet online marketplaces remain extremely difficult to build, say Andrei Hagiu of Harvard Business School and venture capitalist Simon Rothman of Greylock Partners. Most entrepreneurs and investors attribute this to the challenge of quickly attracting a critical mass of buyers and suppliers. But it is wrong to assume that once a marketplace has overcome this hurdle, the sailing will be smooth. Several other important pitfalls can threaten marketplaces: growing too fast too early; failing to foster sufficient trust and safety; resorting to sticks, rather than carrots, to deter user disintermediation; and ignoring the risks of regulation. This article draws on company examples such as eBay, Lending Club, and Airbnb to offer practical advice for avoiding those hazards.
The 16 Network Effects & How They Actually Work
Airbnb gets less press than Uber, but in some respects its even more radical: understanding how it works leads one to question many of the premises of modern society from hotels to regulations. It&…
Credit where it's definitely due: this post was inspired by a Twitter conversation with Box CEO Aaron Levie. Don't look now, but something remarkable is happening. Instagram had twelve employees when it was purchased for $700 million; all of its actual computing power was outsourced to Amazon Web Services. Mighty ARM has only 2300 employees, but there are more than 35 billion ARM-based chips out there. They do no manufacturing; instead they license their designs to companies like Apple, who in turn contract with companies like TSMC for the actual fabrication. Nest Labs and Ubiquiti are both 200-employee hardware companies worth circa $1 billion...who subcontract their actual manufacturing out to China.
Editor’s Note: Nir Eyal blogs about the intersection of psychology, technology, and business at NirAndFar.com. Sangeet Paul Choudary analyzes business models for network businesses at Platformed.info. Traditionally defined as a system where each new user on the network increases the value of the service for all others, a network effect often creates a winner-takes-all dynamic, ordaining one dominant company above the rest.
To explore the future of online networks, it's important to note how network effects correlate with value and the factors that make these network effects work in reverse.
The world’s most successful companies all exhibit some form of structural competitive advantage: A defensibility mechanism that protects their margins and profits from competitors over long periods of time. Business strategy books like to refer to these competitive advantages as “economic moats”.
The most successful companies and products of the internet era have all been predicated on the concept of network effects, where the network becomes more valuable to users as more people use it. This is as true of companies like Amazon and Google as it is for open source projects like Wikipedia and some cryptocurrencies....