Explaining Network Effects – From Facebook, to Poker to Bitcoin
video: Explaining Network Effects – From Facebook, to Poker to Bitcoin
A lot of people might have heard the term network effect, and aren’t certain what it means.
Basically, its the premise that as the number of users on a network grow, the more valuable the network becomes.
Imagine you are Alexander Graham Bell, and just invented the telephone, congratulations!
Unfortunately, it’s worthless!
Because you have no one to call. But the moment you install a second line, suddenly the invention has utility, *ring ring*
But if none of my friends own a telephone, I’m not incentivized to purchase one. But then Larry gets one, well, now suddenly we’re likely in business.
The more users come onto the network, the faster the adoption of it, speeds up.
Similarly, Facebook. If there were 20 people on Facebook around the country, would you take the time to create a profile? But the more people pile in, once you hit a certain mass number of users, it acts like a magnet of increasing power, attracting more users, and keeping current customers coming back.
Example: With all the complaints about social media companies like Twitter and Facebook, and users threatening and actually attempting to switch elsewhere, they often find that they just don’t get the same engagement, meaning that most who quit, like cigarettes, eventually return for the high.
Breaking the gravitational pull for massive numbers of users, would take a tremendous amount of leverage and power, gained only generally from what I will speak of momentarily.
1) There is a first mover advantage when you create a something new, and most companies will operate at a loss and incentivize users to join in hopes of cementing the network effect.
Take Airbnb, which has within its platform the largest number of hosts and potential renters. The larger the numbers on both sides of the equation, the greater the gravitational pull.
Same with Google and Bitcoin.
Well, those might leave you scratching your head. “I don’t care who else uses the Google search engine, I only use them because I get the best result. It’s not like leaving Facebook man.”
Granted, but the reason you get superior results is due to all the people who use Google, giving them a superior amount of data that continue to insure the results you get are better than Bing, Yahoo, or Brave. Once again, the more users they have which help them generate superior search results, the harder it is to break free of the gravity created.
Okay, but what about bitcoin. Again, the more people that adopt it, that believe it an incorruptible store of value with a fixed, limited supply, the greater the number of businesses that will accept it as a form of payment.
As more businesses come online, the more individuals will adopt it, especially as a form of remittance as it saves massive amounts of fees versus using Western Union, the more people are incentivized to build atop the network in a layer II protocols, called the lightning network. The more energy input you have from talented, smart people working in the space, advancing the competitive advantage, the more users it attracts, which begets more businesses, which begets more programmers, until you have a network effect with the gravity of a black hole.
So, can the network effect be broken? Sure.
Take Kodak, who owned the golden goose, the monopoly of film processing, and ignored their own invention of the digital camera, which quickly put physical photographs out of business.
Facebook wasn’t the first in the social media game, they took out MySpace, which by no means had a dominant stranglehold, by offering a superior product technologically.
In both cases, new, far superior technology, eroded competitive edge and network these formerly dominant firms had.
It can also be government.
Back in the day, everyone played poker online at PartyPoker, because everyone played at PatyPoker, it was where the action was. Then one day the US Government declared it illegal for the poker sites to take the money of Americans, and the PartyPoker, publicly traded at the time in the UK, was legally forced to jettison all of its American players, reducing its gravity, opening the door for their competitors.
Or it can be self-inflicted. Many of the big layers in Silicon Valley are have value ideology more highly, than even profits and are actively kicking off users for stating such horrible things like “Men are not women,” settling them on other platforms, or in the case of YouTube censoring and making their creators feel unwelcome and ill at ease to where we actively promote alternatives, like Rumble, join me there, link is in the description. These are hopefully self-imploding stars.
So what could destroy bitcoin? Government action, but China already took a battle axe to the tree of bitcoin by banning mining in the country, and the resiliency of the network stood, and the US government has been affirming bitcoin, surprisingly, a note of credit there, and the greater the number of people that own some, the harder it will be politically to strike it down, as the globalists and Commies at the World Economic Forum dream of.
But network effects, and the potential to develop them, are a key reason to invest in a company, where your stream of revenues are more secure.
More secure that is, until new technology comes and eats away at once seemed like an impregnable business model. And there, hopefully you have a greater understanding when someone utters the term “network effect.”