In the digital age, network effects have emerged as the most powerful way to create defensibility for tech companies. According to a recent three-year study, network effects are responsible for 70% of the value created by tech companies since the inception of the Internet in 1994. They are one of the four remaining defensibilities in the digital age, along with brand, embedding, and scale. Of these four, network effects are by far the strongest.

In the digital age, network effects have emerged as the most powerful way to create defensibility for tech companies. According to a recent three-year study, network effects are responsible for 70% of the value created by tech companies since the inception of the Internet in 1994. They are one of the four remaining defensibilities in the digital age, along with brand, embedding, and scale. Of these four, network effects are by far the strongest.

It's important to note that network effects are not the same as viral effects. While viral effects focus on acquiring new users for free, network effects are about creating defensibility. The strongest and simplest network effects occur when increased usage of a product directly increases its value to users. Even if a competitor were to create a better product, it would struggle to make up for the lost value of the established network. This is why new entrants need to achieve a comparable network effect to realistically produce a similar amount of value for their users.

Reed's Law, proposed by Reed Hastings, the co-founder of Netflix, states that the true value of a network increases exponentially in proportion to the number of users. This exponential growth is even faster than what Metcalfe's Law describes. In fact, many physical networks, such as utilities, become winner-take-all markets that eventually turn into monopolies and end up being nationalized. Once a protocol or network has been adopted, it becomes extremely difficult to replace it. This is evident in the continued use of the fax protocol and the TCP/IP protocol, despite the existence of potentially better alternatives.

Personal Utility Networks are another form of network effects that are typically used for practical purposes. These networks provide substantial utility to the user, and they are often used for private communication rather than public communication. The value of joining a network increases when people you know from the real world are already using it for their identity and reputation. This adds a large value to you as an individual, incentivizing you to join the network.

When it comes to same-side users interacting within a network, it's important to consider that most of the time, these users subtract value directly from each other. However, by aggregating competing sellers in one location, marketplaces allow sellers to get more business than if they were spread out. This makes it practical for competitors to co-locate. Breaking apart these marketplaces requires offering a better value proposition for both parties simultaneously.

However, marketplace defensibility has a weakness known as "multi-tenanting". Multi-tenanting occurs when members of a marketplace or platform use multiple alternatives simultaneously. This poses a challenge for platforms as both sides of the platform can engage in multi-tenanting. For example, app developers can create versions of their app for both iOS and Android. Overcoming this challenge requires designing the product or service to add so much value or "lock-in" that members are not tempted to multi-tenant.

Data Network Effects occur when a product's value increases with more data, and additional usage of the product yields more useful data. The relationship between product usage and the amount of useful new data gathered can be asymmetrical, following a pattern similar to the 90-9-1 rule. Technological advantages, on the other hand, have a short half-life and are not as defensible as network effects. Being the first to introduce a technology only provides a temporary advantage before competitors catch up.

Social network effects operate through psychology and the interactions between people. While they can be challenging to deploy for long-term defensibility, successfully leveraging psychology against competitors can provide a significant advantage. Language, for example, has historically displayed a "winner-take-most" tendency, with people in the same social and economic units coalescing around a single language. Startups can take advantage of this network effect of language in two ways: by creating business category language and by naming their company or product strategically.

Belief network effects can be compared to sand. In small quantities, belief network effects dissipate easily, but when layered upon each other, they become as hard as stone. Belief network effects occur when beliefs become more valuable to believers as more people adopt those beliefs. Bandwagoning is a phenomenon where social pressure to join a network causes people to fear being left out. Apple, for instance, has mastered the art of creating bandwagon network effects with their carefully scripted product demos and launches.

However, it's important to note that if too many people join a movement, the early adopters may abandon it because it has become too mainstream. This is why bandwagon network effects are typically observed at the beginning of a product's lifecycle. For long-term defensibility, it is necessary to consider other network effects that can sustain the product beyond its initial hype.

In addition to network effects, curation has also emerged as a valuable service in the digital world. Curators act as life preservers for the web, saving users from drowning in content. They are domain experts or individuals with a deep passion for a specific topic who sift through the vast amount of content available to find the best resources. Good curators spend countless hours searching for and formatting high-quality content for their audience. The focus is on quality rather than quantity.

In conclusion, network effects are the most potent way to create defensibility in the digital age. By understanding the different types of network effects, companies can leverage them to establish a strong competitive advantage. Additionally, curation as a service has become increasingly valuable in the face of overwhelming amounts of content. By curating high-quality resources, curators can provide a valuable service to users seeking reliable information. To make the most of network effects and curation, here are three actionable pieces of advice:

1. Prioritize building and leveraging network effects in your business model. Understand the different types of network effects and how they can strengthen your product or service.

2. Consider the power of curation as a service. If you have domain expertise or a passion for a specific topic, explore the possibility of becoming a curator and providing high-quality curated content to an audience.

3. Continuously innovate and adapt to sustain your network effects. Network effects can be powerful, but they are not permanent. Stay ahead of the competition by constantly improving your product or service and exploring new avenues for growth.

By understanding and harnessing the power of network effects and curation, businesses can create defensibility and establish themselves as leaders in the digital world.