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Network Effects: Do They Even Matter?



The concept of network effects can be summed up in one idea, the value of a product increases the more people use it. An example from the class was as the number of people attending a party increases, so does the appeal of the party to another individual. Another easy example to help demonstrate network effects is a online multiplayer game; if one were to play by oneself, then the game would have no value. If there were a large number of people online, then the game would have a much larger value because there would be many more players to interact with.


In theory, one would think network effects would be a powerful factor in the value of an item. In the past this was the case as stated by the article. Before the rise of the digital era, many systems depended on the compatibility of the hardware involved. This meant in order to construct a system that could interact with others, one would need to use the same components. Another way to put this was, the more one product was in use, the more other users would want to use it in order to be compatible.


This article hypothesizes that “platforms which exhibit network effects may be purely digital”. Due to the rise of the digital era, there are many old platforms that are becoming obsolete. New platforms that are not dependent on one type of hardware are replacing the old ones. The example this article uses is the old iTunes store. If a user started investing in purchasing songs to include in their online library, the user would become more and more invested in the iTunes library and would be less and less likely to switch to some other platform. However with the rise of Youtube and Spotify which can be played from any device, many users are not using the iTunes store anymore. “What does a music library of mp3s matter when you can stream any song at all at any time?” asks the article. I believe a new standard for network effects is evolving as users settle into the digital era, one orientated around the availability of a product.


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