Network Effects in Tech
The implementation of network effects is widely used by tech companies. Most of the largest tech companies/brands, such as Apple, Google, Microsoft, etc., use network effects to grow. It is a simple yet powerful concept to grow one’s business and secure one’s own properties, connections, and products. The concept is that when a new user enters the network implemented with network effects, all of the products related to the network will be more valuable to all other existing users, and the number of users will grow more if the network is expanded more as well. Moreover, what makes network effects valuable is not the products themselves but the network that the people and connections created by the products. In 2022, 70% of all values in the tech industry were created by network effects.
In the lectures, we talked about when there are multiple similar products in a market, and when one product A passes its tipping point, it is really difficult for another similar product to beat product A out of the market due to network effects. With the help of network effects, a company’s products can be more defensible. For example, the systems of IOS and Android. When more people use Apple-related products, they have to purchase other Apple-related products in order to connect the devices and use Apple’s services. This network of systems created by Apple makes their products defensible by using their own network and makes people purchase more products, which is reinforced by network effects. Even if a particular product is superior to Apple’s, users may still prefer purchasing Apple products due to its network and connection.
Link to article: https://www.forbes.com/sites/forbesbusinesscouncil/2022/10/11/network-effects-the-hidden-force-behind-70-of-value-in-tech/?sh=128c59ad30ed