Definition: Network effects make products more valuable as more people use them.
Example: If everyone you know is on Facebook it becomes more valuable to use.
Example: Developers write software for Apple devices because there are hundreds of millions of users, Apple users continue to stay as this is where the apps are.
Insight: Monopolies usually share some characteristics including network effects.
Insight: The product must be valuable to the first users when the network is small, otherwise there will not be an incentive for users to share.
Insight: If products only work at scale, the user base will not grow large enough to see network effects - therefore network effect businesses must start with small markets.
Insight: Small minorities achieve disproportionate results.
Reference: Vilfredo Pareto discovered the Pareto Principle or 80/20 rule - 20 percent of people owned 80 percent of the land in Italy, and 20 percent of pea pods produced 80 percent of peas in his garden.
Insight: The best products don't always win. This can be due to path dependence: historical circumstances can determine which businesses or products are widely adopted.
