What are Network Effects?

When talking about platform businesses, the conversation often includes a reference to network effects and how platforms can more quickly create value for different types of user groups. The concept of network effects can seem difficult to grasp at a glance but is really quite simple. By understanding network effects first, platform designers can begin to implement platform growth techniques that capitalize on their understanding of network effects.

70% of Value in Tech is Driven by Network Effects

The Big 5 — Apple, Google, Microsoft, Facebook and Amazon — are hitting all time high valuations. Airbnb is worth more than Hilton in the private market. Uber is worth more than GM. Spotify and Dropbox IPOed in 2018, with Slack and Didi Chuxing on an IPO track. It’s fitting they should all be mentioned in the same breath, because other than Amazon, their business DNA is amazingly similar. They are all network effect businesses. And it turns out that most of the outsized returns of companies since 1994 have used network effects.