The Network Effects Manual: 13 Different Network Effects (and counting)

NFX
NFX
Jan 9, 2018 · 28 min read

Nfx basics

Direct Network Effects

‍‍Excerpts from the AT&T 1908 Annual Report
‍‍Each node in a digital network is connected to every other node, as represented by the diagram above. Every additional node that joins a direct network adds a new connection for all the existing nodes, so the number of new connections (network density) increases as a square of the number of nodes (N2). Since the value of a network is proportional to its density, each additional node adds to the network value at a geometric rate.

Physical (Direct)

‍‍The diagram above depicts the shape of a physical network, with the nodes representing utility terminals like landline phones, train stations, or water faucets, and the connections between nodes representing physical infrastructure like landlines, train tracks, or water pipes.

Protocol (Direct)

‍‍Protocol networks coalesce around communication and computational standards, which form the basis for the links between nodes (e.g. Bitcoin miners and Bitcoin wallets).

Personal Utility (Direct)

In the diagram above, the nodes are represented by the chat bubbles of people (nodes) connected by personal utility services (links). The nodes of a personal utility network are tied to the real-life identity of the people using it, and the network is especially dense because it has many local sub-groupings. This brings Reed’s Law into effect, so the value of Personal Utility Networks could increase at a rate of up to 2^N.

Personal (Direct)

‍‍Personal Networks involve personal identity and reputation, connecting the persona of each user with other user personas. Each additional node represents both an additional potential audience member as well as an additional content producer for all the other nodes.

Market Networks (Direct)

2-Sided Network Effects

Marketplace (2-Sided)

‍‍2-Sided Marketplaces have two sets of nodes, as shown above. One set are supply-side users, the other are demand-side users. They provide direct value for each other through the marketplace, which is an intermediary represented by the central node in the diagram.

Platform (2-Sided)

‍‍‍2-sided platforms have supply-side nodes (developers) and demand-side nodes (users), which create value for each other through the intermediary of the platform itself (central node). The platform itself also provides significant value for both sides.

Asymptotic Marketplace (2-Sided)

Data Network Effects

‍‍With a data network, each node (user) feeds useful data to the central database. As the aggregated data accretes, the value of the data for each user also grows.

Tech Performance Network Effects

‍‍Networks with tech performance nfx become better (faster, cheaper, or easier to use) the bigger they get. As more nodes (devices) join the network, the performance of the whole improves.

”Social” Network Effects

Language (Social)

Belief (Social)

Bandwagon (Social)

The power of network effects


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