Understanding Network Effects Metcalfe s Law network effects the value of a product or service increases as the number of users grow network effect refers to a common user base that is able to communicate and share with one another Exchange every kind of network effect must have some sort of exchange Staying power the ability of a product to stay in business for many years networks with greater numbers of users have high staying power sometimes referred to as companies stickiness switching costs the cost a consumer incurs when moving from on product to another complementary benefits those products or services that add additional value to the network ex how to books software or labor platforms products and services that encourage others to offer complementary goods One sided market a market that derives most of its value from a single class of users Same sided exchange benefits benefits derived by interacting among members of a single class of participant Two sided market network markets compromised of two distinct categories of participants both of which that are needed to deliver value for the network to work Cross sided exchange benefit an increase in the number of users on one side of the market creates a rise in the other side network markets have HUGE competition tend to be very monopolistic o monopoly market with many buyers but only one o oligopoly market dominated by a small number of dominant seller powerful sellers best product does not always win Understanding Network Effects ex xbox received many more reviews and shit than PS2 but PS2 was more loved by people so more games came out for PS2 technology leapfrogging competing by offering a superior generation of technology ways to compete with network effects form alliances move early bring in new categories be compatible with larger networks make preannouncements convergence when two or more markets once considered very separate begin to offer similar features and capabilities envelopment a firm seeks to make an existing market a subset of its product offerings backward compatibility making new products that are compatible with the older ones congestion effect network effects attract too many users and the service can be overwhelmed and unusable
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