Network Effects Enable Massive Wealth Creation
"Network effects is the term given to systems in which the value of each user is increased as the number of users goes up. Such network effects are common on the internet; for example, eBay and Facebook. The value of some such systems is roughly in proportion to the number of connections between users, meaning that if the user base doubles, the value of the system quadruples. This also acts as a barrier to new competitors, since new users are much more likely to join your system than a smaller one that doesn't offer the same value. If your company believes it will able to leverage such network effects, it often makes sense to treat the first users as a loss leader and get big as fast as you can."
The Importance of Network Effects
"Network effects exist when the value of a network is roughly proportional to the square of the number of users. Network effects are sometimes also called demand-side economies of scale. Most systems do not display network effects, but for those that do, it is an extremely powerful force. It can set up a positive feedback loop, enabling the leading company to keep leading. By having the largest network it already offers the most value for its users, and where network effects exist users tend to gravitate toward the largest network because they know it will be even bigger in the future. Network effects can sometimes be so powerful that they overwhelm niche ownership."