Network Effects

Network effects, network effects
Free leverage

[Chorus]
Network effects, network effects, network effects
Free leverage
Network effects, network effects, network effects
Free leverage

Bob Metcalfe, who created Ethernet famously coined Metcalfe's Law, which is the value of a network is proportional to the square of the number of nodes in the network
(Nodes in the network)
(Nodes in the network)
If a network of size 10 would have a value of a hundred, network of a size hundred would have a value of 10,000
It's not just 10X more, it's 100X more
So you want to be in a network effect business
If you're number one in the network effect business, you win everything
One of the dirty secrets of Silicon Valley is that a lot of the winning businesses are natural monopolies

[Chorus]
Network effects, network effects, network effects
Free leverage
Network effects, network effects, network effects
Free leverage

What is a network effect? Let's define it precisely
A network effect is when each additional user adds value to the existing user base
So your users themselves are creating some value for the existing users
The classic example that I think everybody can understand is language
Let's say that there's a hundred people live in a community, speak 10 different languages and each person just speaks one of those 10
You're having to translate all the time, it's incredibly painful
If all hundred of you spoke the same language, it would add tremendous value
10 people start off speaking 10 languages, one extra person learns English
Well, now all of a sudden 11 people know English so that the next person who comes in to learn new language probably gonna choose English
At some point, let's say English gets to 20 or 25 people, it's done
It's just gonna own the entire language marketplace and the rest of the languages will get competed out

[Chorus]
Network effects, network effects, network effects
Free leverage
Network effects, network effects, network effects
Free leverage

The network effect is are very powerful concept
When you're picking a business model, it's really good idea to pick a model where you can benefit from network effects, low marginal costs, and scale economies, and these tend to go together, like anything that has zero marginal cost of production obviously has scale economies
And things that have zero marginal cost of reproductions very often tend to have network effects because it doesn't cost you anything more to stamp out the thing so then you can just create little hooks for users to add value to each other
So you should always be thinking about how your user, your customers, add value to each other
Because that is the ultimate form of leverage
You're on the beach in the Bahamas or you're sleeping at night and your customers are adding value to each other

[Chorus]
Network effects, network effects, network effects
Free leverage
Network effects, network effects, network effects
Free leverage

[Chorus]
Network effects, network effects, network effects
Free leverage
Network effects, network effects, network effects
Free leverage