Network effects in the Exponential Age

On the latest Exponential View podcast, I speak to James Currier, one of the world’s foremost thinkers on networks and network effects. We take a thorough look at what makes the world’s biggest businesses work, and what that tells us about the next wave of giant, exponential companies.

🔖  (If you'd rather read a transcript of the conversation, you can do so by clicking on the 'Transcript' tab under the audio player).

The big idea

Network effects happen when a company's products and services become more valuable as the number of people using them increases. Many of the world’s biggest companies are powered by that phenomenon, and no-one explains them better than James.

Network effects are at the core of James’ strategy at NFX, the venture capital firm where he’s a partner. NFX has invested in companies including Lyft, DoorDash and Patreon.

[Network effects are] like having another thousand employees at your company... you set up the conditions and then the network grows and then the network density increases and the value gets greater and greater to all your users and they get happier and happier with you. Even though what's adding value to you, your company is actually the addition of new people.

James and his team reckon that since 1994, as much as 70% of the value in tech has been driven by network effects. A quick look at the top end of the Fortune 500 makes it hard to disagree:

If you look at the list of top 13 market cap companies in the world in 2004, the only network effect business that was there was Microsoft. And they are still there today. Of the 13, nine of them are now network effect businesses.

In my book, I call these “unlimited companies” because they combine network effects with platform business models to achieve unparalleled scale and scope in their operations.

As of Oct 6, 2021

But, as I write in my book, too, network effects don't only boost profit-seeking companies. Think of Wikipedia for example, where hundreds of thousands of users globally create, fix and edit content 24/7. The Internet is what it is because of network effects.

Token economics and tribes

James and the NFX team have identified over a dozen types of network effects. One of those is gaining strength with the help of crypto tokens – tribal network effects. James referenced Lionel Messi's deal with Paris St Germain as an example. Messi's signing-on fee was partially made up of the club's cryptocurrency fan tokens.

The more fans you have of PSG, the more fun it is for the other PSG fans. The more fans you have, the more a Messi wants to bond to your network. And once he's there, you get more fans and then the coin gets more valuable, the more valuable the coin is. You're making money so you can buy your beers while you watch PSG. So even a soccer team can be a network effect if you see it as a tribal network effect and then you manage it as such. And now that we have fan tokens for PSG, we can now start to see the reality of the network effects around these businesses, which we couldn't see before.

James and I also discuss:

  • 💰 How the token economy embeds network effects [27m 20s]
  • 🔄 What Facebook would look like if it was run by Reed Hastings [43m 12s]
  • 👨‍⚖️ Why traditional hierarchies won’t regulate networks effectively [47m 45s]

Listen to our discussion here, or wherever you get your podcasts.

Further resources:

NFX’s Network Effects Bible (NFX)

"How to Regulate Facebook, with Nick Clegg" (Exponential View Podcast, 2021)

"Messi joins crypto craze as gets part of PSG fee in fan tokens" (Reuters, 2021)

"Google Maps Doubles Down on Network Effects to Stave Off Formidable Competition (Digital Initiative, 2017)

"Same Network Effects Responsible for Amazon’s Rise Might Lead to its Undoing" (Digital Initiative, 2015)

"Apple's Success and Network Effects" (Cornell University, 2015)

"Google, The New Master of Network Effects" (NYT, 2008)

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