When the value of a product
or service increases as its
number of users expands.
Also known as network
externalities or Metcalfe’s
After studying this section you should be able to:
1. Deﬁne network eﬀects.
2. Recognize products and services that are subject to network eﬀects.
3. Understand the factors that add value to products and services subject to network eﬀects.
are sometimes referred to as
. But don’t let
the dull names fool you—this concept is rocket fuel for technology ﬁrms. Bill Gates leveraged network
eﬀects to turn Windows and Oﬃce into virtual monopolies, and in the process, became the wealthiest
man in America. Mark Zuckerberg of Facebook, Pierre Omidiyar of eBay, Caterina Fake and Stewart
Butterﬁeld of Flickr, Kevin Rose of Digg, Evan Williams and Biz Stone of Twitter, Chris DeWolfe and
Tom Anderson– the MySpace guys—all of these entrepreneurs have built massive user bases by lever-
aging the concept. When network eﬀects are present,
the value of a product or service increases as the
number of users grows
. More simply, more users = more value. Of course, most products aren’t subject
to network eﬀects—you probably don’t care if someone wears the same socks, uses the same pancake
syrup, or buys the same trash bags as you. But when network eﬀects are present they’re among
reasons you’ll pick one product or service over another. You may care very much, for ex-
ample, if others are part of your social network, if your video game console is popular, if the Wikipedia
article you’re referencing has had prior readers. And all those folks who bought HD-DVD players sure
were bummed when the rest of the world declared Blu-ray the winner. In each of these examples, net-
work eﬀects are at work.
Kind of Network
The term ‘network’ sometimes stumps people when ﬁrst learning about network eﬀects. In this context, a net-
work doesn’t refer to the physical wires or wireless systems that connect pieces of electronics. It just refers to a
common user base that is able to communicate and share with one another. So Facebook users make up a
network. So do owners of Blu-ray DVD players, traders that buy and sell stock over the NASDAQ, or the sum
total of hardware and outlets that support the BS 1363 electrical standard.
Network eﬀects are among the most powerful strategic resources that can be created by technology-
based innovation. Many category-dominating organizations owe their success to network eﬀects,
including Microsoft, Apple, NASDAQ, eBay, Facebook, and Visa. Network eﬀects are also behind the
establishment of most standards, including Blu-ray DVD, WiFi, and Bluetooth.