Network effect

This is the effect of how some products and services become more compelling the more that people use them.

The more people use these products the more valuable they become and the higher the barriers to entry of competing products.

What are some typical examples?

• FAX machines - they became very useful the more people had them.

• VHS video recorders versus Betamax.

• Mobile phone operating systems - iPhone and Android versus ‘also rans’ like Blackberry and Microsoft’s offering.

Once a product gains momentum in a market it’s very hard to stop them from becoming dominant. Even though Microsoft was a very well resourced company they were unable to displace iPhone and Android in the mobile phone operating system market.