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:

  1. Direct: when the number of users has a direct impact on the value of a product
  2. Indirect: two-sided (or multi-sided) products where the size of one user group affects how valuable the product is to another user group
  3. 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: