He is married to Daphi Levy-Weiss and is father to Alex, Michael and Itamar, his 3 most important start-ups.Opinions expressed by Forbes Contributors are their own.As an Israeli who has built and invested in tech companies for decades, I’ve got a front-row seat into an innovation ecosystem that consistently churns out world-beating companies, despite being a nation of just over 8 million people.Whatever it is you’re building, or wherever you want to invest, keep in mind that network effects are going to be as dominant on emerging technologies as they were on PCs and mobile phones. The list of anointed ones includes nearly every technology success story of the past 15 years. Bitcoin is a digital or virtual currency created in 2009 that uses peer-to-peer technology to facilitate instant payments. Robotics, a new platform, will mostly be governed by networks of machines working together. For example, eBay bans the sale of live animals on its platform. As a platform scales, its costs per unit sold decreases logarithmically (see figure below). Network effects are one of the most important dynamics in software and marketplace businesses. Network effects are achieved only after a certain critical mass is reached but can prove to be a very strong source of value and competitive advantage beyond that point.
The network effect comes into action once the platform/service gains a large percentage of subscribers. This strengthens Youtube’s resilience to competition.
Multiple network effects …
Providers of goods and services that use a network effect must ensure that capacity can be increased sufficiently to accommodate all users. The concept of network effects can seem difficult to grasp at a glance but is really quite simple. Customer to customer (C2C) is a business model whereby customers trade with each other using a third-party platform such as eBay or Craigslist. the Uber driver will have access to more passengers, making the transaction fee worth the cost). But today, things are not quite so simple. Some of the leading, fastest-growing companies have achieved success because of the network effects. When I evaluate startups who don't have a clear network effect, I ask: "What's going to be your defensibility: even if you grow, what's next? When TV came out the TV networks became network effects businesses because they took creators and consumers and connected them. Which means that the value of the platform can be well defined by the number of signups and user bases. This is what disruptors in Israel get very early on. Uber made some investment in developing Uber, and today continues to improve the app through developers to enhance user experience, but development costs do not have a one-to-one relationship with each new user acquired. consumers) join the platform, the more useful and valuable it is to drivers (i.e. An Uber driver pays a fee to Uber for services rendered through the app.When a platform attains a critical mass of users, the cost of joining the platform is outweighed by the value of joining, with most of that value being derived from the power of the network (e.g. If after you join, you post quality content, and that leads to many people enjoying the experience, it'll boost engagement–creating a network effect. (We wrote an article that explores in depth the financial differences between In contrast, a platform grows not by buying more assets, but by acquiring more users, which has a near-zero cost. In a platform’s early days, there’s a chicken and egg problem – consumers only want to be on a platform with an existing network of producers, and vice versa. Also noteworthy is that fact that many of the most successful platforms today began with a niche focus on a particular demographic. Digital marketing is the use of the internet, mobile devices, social media, search engines, display advertising, and other channels to reach consumers. This is a positive direct same-side network effect (adding to the core 2-sided network effect) that is typical of operating systems. The difference is key to the exponential growth we have witnessed in platform business models.Direct network effects are also known as same-side effects. To ensure quality, platforms must focus on two aspects of the platform: user access (who is on the platform) and content/catalog curation (what is on the platform).Collaboration enables users to self-organize into new networks that advance the specific agendas that are important to them individually.
Perhaps this explains some of the high valuations we see in platform businesses today.
In a sense, it’s user-enforced curation.
Thanks to the Internet and sharing technology, information goods today have a near-zero marginal cost of distribution.And investors have taken notice. Trends in fashion also influence the buying patterns of consumers. As more drivers became part of Uber and Lyft, the two brands gained in market value. For example, if there are many developers producing great apps on a given platform – say Apple’s iOS – more consumers will be drawn to that platform and will go out and buy iPhones. In figure 2, pricing without taking network effects into account means finding prices that maximize the areas of the two blue rectangles.
Multiple network effects have occurred from individuals joining social media platforms. Since then, successful network effects businesses have sung from essentially the same hymnal. For example, if you're in VR the first rung of success will be the actual hardware, things like Oculus and HTC Vive. The reverse is also true.