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A Summary of

Foundations for Mastering Network Effects

James Currier
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Network effects have become instrumental to value creation in a networked economy, so NFX has summarized key articles under three main headings (Network Science, Network Effects, and Defensibility) to help people master how they work.

Network Science

  • Definition: the academic study of complex networked systems and their real-world properties.

The Small-World Problem

  • The first empirical study of personal direct networks that verified the existence of the “small-world phenomenon,” popularized as six degrees of separation.

The Strength of Weak Ties

  • Weak ties or acquaintances connect nodes in different network cliques, reduce the overall average degree of separation, and are crucial to the cohesion of a network.

Social Capital in the Creation of Human Capital

  • Social capital arises from a mix of network structure and its strength of ties which is important to the formation of norms and trustworthiness within a network.

Collective Dynamics of ‘Small-World’ Networks

  • The “small-world network” thesis shows a larger network can still be fairly cohesive (without risking network pollution) if a few “shot-cut” connections exist.

Emergence of Scaling in Random Networks

  • One of the first to use real-world data to evaluate network topology, it shows that a small number of “rich” nodes accrue the most links via preferential attachment.

The Structure and Function of Complex Networks

  • An all-inclusive resource, it examines the foundations of network science and how network properties are statistically studied with real-world implications.

Four Degrees of Separation

  • A 2012 Facebook study observed 3.74 degrees of separation on its network which shows how network effects can be applied to technology companies.

Three and a Half Degrees of Separation

  • A 2016 Facebook study observed fewer degrees of separation on its network which shows the increasingly networked nature of the world due to the internet.

Network Science

  • A foundational resource on network science as well as graph science, preferential attachment, and other fundamentals to study and apply to companies.

The Square and the Tower

  • An evolution of social and political networks and hierarchies throughout history, it explains network science in an accessible way using real-world context.

Network Effects

  • Network effects have become the most important source of value creation in a networked economy.

Increasing Returns and the New World of Business

  • A look at diminishing returns markets and increasing returns markets, it explains how to actively manage increasing returns to be successful.

A Theory of Interdependent Demand for a Communication Service

  • An examination of the “dynamic demand" for communications services and “demand-side economies of scale," it features how to navigate pricing models.

Platform Competition in Two-Sided Markets

  • A pricing structure formula for 2-sided markets, it is based on an understanding of network effects to account for the complexities of multi-sided networks.

Network Externalities (Effects)

  • An overview of the early literature of network effects, it breaks down network effects into their basic elements and looks at network externalities versus network effects.

Metcalfe’s Law is Wrong

  • An arguably failed attempt to disprove Metcalfe’s Law, it suggests an alternative formula for valuing network effects using logarithmic rates as network scales.

Metcalfe’s Law Recurses Down the Long Tail of Social Networking

  • Metcalfe’s revision of his own Law, it debunks counterarguments and further refines some areas to strengthen his Law and discuss newer phenomena.

Metcalfe’s Law After 40 Years of the Ethernet

  • A follow-up, more formalized rebuttal, it proves the validity of his Law using real-world data and anecdotal pieces to show how network effects help sell vision.

Data Network Effects in SaaS Enabled Marketplaces

  • Software-enabled marketplaces have four key advantages that allow them to collect a high volume of valuable data and get a data network effect going.

A16z Podcast: Not All Network Effects are Created Equal

  • A recap of the history, evolution, and taxonomy of network effects, it provides valuable insight.

Strategies for Two-Sided Markets

  • An analysis of two-sided markets, it shows how to optimally navigate the complexity of multi-sidedness and handle supply and demand dynamics.

Required Reading for Marketplace Startups: The 20 Best Essays

  • An anthology resource, it features real-world, applied approaches to build marketplaces.

Pipes, Platforms, and the New Rules of Strategy

  • A framework for understanding a platform ecosystem and its four types of players, it makes it clear how dominant network effects are as digital-age defensibility.

Other Defensibilities

  • Network effects are the most important defensibility since they are native to the internet.

Defensibility Creates the Most Value for Founders

  • A look at why defensibilities create the most value and competitive advantages can only get you so far, it discusses core concepts and strategies to implement.

Economies of the Moat and the Castle

  • An interesting early formulation of the defensibility theory by Warren Buffet.

How Competitive Forces Shape Strategy

  • Also known as the “Five Forces Model,” it outlines competitive forces that shape industries and gives insight into company defensibility and profitability.

All Revenue is Not Created Equal

  • A look at how companies are valued against their revenue, it explains how to understand how investors value companies and what draws their interest.

Reinforcement: The Hidden Key to Building Iconic Tech Companies

  • The more defensibilities you add to your company, the more powerful all your other defensibilities become, and core network effects are easiest to reinforce.

The Dentist Office Software Story

  • A fictional anecdote, it shows it is lethal to not have a defensibility strategy.

Amazon Go and the Future

  • A case study of Amazon, it looks at the mechanics of scale effects, explains tech companies’ unique scale advantages, and why scale is an effective defensibility.

The Scale of Tech Winners

  • A discussion of modern tech giants, it explains how scale enabled them to build secondary competitive advantage.

Beyond Network Effects: Digging Moats in Non-Networked Products

  • A discussion of the other three defensibilities (scale, brand, and embedding), it also breaks down three reasons for why scale makes companies more defensible.
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