The Network effect results from positive feedback, where success begets success and economies of scale undermine the competition.

The effect can be observed with Ebay, Microsoft, or even the largest local newspaper. Once Ebay had established itself as the site to visit in order to sell things, this attracted even more sellers as they realized it had the largest audience. So why bother to list on another site?

The process snowballs and provides a large barrier to any competition.

With Microsoft, network economies are present with both the Windows operating system and Microsoft Office. In addition, complementary products provide an important reinforcement to the network. For example, a video game producer will obviously want to develop the program for Windows and if the game is a hit, this provides the user with another benefit of using Windows.


'The Little Book That Builds Wealth', by Pat Dorsey:

The bottom line is that you're most likely to find the network effect in businesses based on sharing information, or connecting users together, rather than in businesses that deal in rival (physical) goods... this is not exclusively the case, but it's a good rule of thumb.


This powerful network effect was encapsulated by Bob Metcalf, the inventor, of Ethernet.

He stated that if there are n people in a network...

See interactive ebook on iBookstore