Self-reinforcing flywheels.
Network effects create winner-take-all-dynamics where only one or two firms end up dominating an entire industry and can’t be challenged.
Broadly divided into three categories:
- Direct: when the number of users has a direct impact on the value of a product
- Indirect: two-sided (or multi-sided) products where the size of one user group affects how valuable the product is to another user group
- Data: products which become better with more users via the data those users generate
Things that also reinforce network effects:
- Switching costs: how difficult or expensive it is for a user to switch from one product to another
- Multihoming costs: how easy or likely it is to use multiple competing networks simultaneously
Both of these costs are not necessarily monetary – they can also be psychological or time/effort-based
Once a platform reaches a certain level of dominance, it becomes a new default and moves down a layer of the stack:
