As we’ve said, nfx are the #1 way to create defensibility in the digital world. Companies with the strongest types of nfx built into their core business model tend to win, and win big.

Our three-year study, which we released recently, shows that nfx are responsible for 70% of the value created by tech companies since the Internet became a thing in 1994.

Network effects are one of the four remaining defensibilities in the digital age, including brand, embedding, and scale. Of the four, network effects are by far the strongest.

Network effects are not viral effects. Network effects are about creating defensibility, and viral effects are about getting new users for free. They have totally different objectives and playbooks.

The strongest, simplest network effects are direct: increased usage of a product leads to a direct increase in the value of that product to its users.

a better product wouldn’t come close to making up the lost value of the network. A new entrant would have to achieve a comparable network effect to realistically produce a comparable amount of value for its users.

Reed believed that the true value of a network increases exponentially (2^N) in proportion to the number of users, much faster even than what Metcalfe’s Law described. We now call this Reed’s Law.

In fact, most Physical Networks are utilities: winner-take-all markets that develop into monopolies and end up being nationalized.

Once a protocol has been adopted it is extremely difficult to replace. Note how the fax protocol is still in use, or the TCP/IP protocol (even though other, better protocols now exist for those purposes).

If people you know from the real world are all using the same product to house their identity and reputation, there’s a large value add (to you) if you join the network yourself.

Personal Utility Networks are typically used for things that need to get done. There is a substantial amount of practical utility to the user. Second, Personal Utility Networks are typically more for private communication, rather than public communication. Personal Networks are less vital.

It’s more complicated when we look at how same-side users interact. Most of the time, users on the same side subtract value directly from each other.

By aggregating competing sellers in one location, sellers were able to get much more business than others that were spread out, making it practical for competitors to co-locate.

To break them apart you must have a better value proposition for both parties simultaneously, or else nobody moves. Customers are there for the vendors, and vendors are there for the customers. One won’t leave without the other.

there’s one big weakness in marketplace defensibility, which arises from the phenomenon of “multi-tenanting”.

The goal of the marketplace is thus to design the product/service to add so much value or “lock-in”, particularly on the supply side, that members won’t be tempted to multi-tenant.

One vulnerable point for platforms is that, just like with marketplaces, both sides of platforms can also multi-tenant. App developers can create versions of their app for both iOS and Android.

The “Value Curve” diagram below illustrates the supply and demand curves for three subcategories of marketplace nfx.

Asymptotic Marketplaces are more vulnerable to competition than other marketplaces for this reason. If Uber has 1000 drivers in a certain area, a competitor might be able to provide comparable service with half as many.

When a product’s value increases with more data, and when additional usage of that product yields data, then you have a Data Network Effect.

the relationship between product usage and the amount of useful new data gathered can be asymmetrical.

Technological advantages have a short half-life and aren’t very defensible anymore. If you’re the first to come out with a technology, the rate of innovation ensures that it won’t be long until the competition either copies your technology or develops it themselves. But with Tech Performance nfx, your product gets a runaway advantage for being the first out of the gate.

“social” network effects. They work through psychology and the interactions between people.

Social nfx are usually the hardest to deploy for long-term defensibility. However, if you can successfully get various forms of psychology on your side against a competitor, they can represent a significant advantage.

That’s why, throughout history, language has displayed a “winner-take-most” tendency. People in the same political, social and economic units tend to coalesce around one language.

Startups can use the network effects of language to take advantage of that winner-take-most effect in at least two ways: first, in creating business category language; and second, in naming a company or product.

beliefs become more valuable to believers the more people believe.

Belief nfx are like sand. In small quantities, sand dissipates in a breeze. But if you layer enough sand down on top of itself, it becomes hard as stone.

Bandwagoning happens when social pressure to join a network causes people to feel they don’t want to be left out.

One company that has made Bandwagon nfx a core expertise is Apple. Every year, with a carefully scripted performance, they re-manufacture buzz and FOMO with their new product demos and launches. This has been extremely effective.

If too many people join a movement, sometimes the early adopters will abandon it because the group has become too mainstream. That’s why you typically see the Bandwagon nfx at the beginning of products.