Network Effects
The concept of network effects is a powerful mental model through which to evaluate businesses, human societies, and nature. But what are “network effects” and how do they work? First, a few definitions. A network effect is a phenomenon by which each incremental user of a product or service adds value to the existing user base. The product or service becomes more valuable to the users as more people use it. It is a positive feedback loop. The idea originated with Theodore Vail, the president of American Telephone and Telegraph (AT&T). In the company's 1908 annual report, Vail wrote, "[The telephone's] value depends on the connection with the other telephones — and increases with the number of connections." While the term "network effects" had not been created, it was clearly at the heart of Vail's comment. The value of a telephone relies on its connection with other telephones in the network. For an existing user, this value increases with eve...