Network effects exist when a product becomes more valuable to each user as more users join, creating a self-reinforcing dynamic where leaving becomes increasingly costly. They are the strongest category of moat available to a startup because they compound rather than depreciate. They explain why a handful of platforms (Facebook, Uber, eBay, LinkedIn, Visa, Microsoft Excel) dominate their categories despite having no patent or proprietary technology that competitors could not replicate.
The major types: direct network effects (one-sided, also called same-side) where each user benefits directly from more users of the same kind, as in phones, fax machines, WhatsApp, or Zoom; two-sided or multi-sided network effects where multip...