Network Effects: How Your Connections Matter

CEO of ReAlpha. Tech entrepreneur: 1 IPO, 2 exits. Author: “Nothing about Nasdaq.”

The world is much smaller than we think, and many of us have had the experience of meeting someone new and being amazed at the coincidence of how many friends or acquaintances we have in common. Why do such events that seem to be mere coincidences happen?

Network effect from a business perspective

Over the years, technological products have contributed to the development of the social order. The condition “network effect‘, according to Investopedia, ‘refers to the phenomenon by which an organization’s product and or services become more valuable as more people use them.’

You could say the first phone was a complete waste of time because it wasn’t until connected to a second phone that two people could communicate. This is what is meant by a “network effect; it describes the benefit of participating and how something can become more attractive and useful as more people get involved. In other words, value increases as usage increases. This also applies to SEO and in the field of social media marketing.

Network Effects Models

According to a study by NFX, tech companies have had an estimated 70% of their value through network effects. Network effect companies ultimately create the majority of the value, even though they make up a small percentage of all companies. The study discovered three different types of network effects:

1. Network Effect Companies: These are companies like Facebook and LinkedIn whose value increases as more users use the platform.

2. Platform Companies: These are companies like Apple and Google that build a platform that other companies have built on.

3. Data Companies: These are companies like Netflix and Amazon that use data to gain a competitive advantage.

I see network effects as the best way to create resilience in the digital world. Companies that build the strongest network effects tend to win big.

Kevin Kelley 1,000 True Fans Theory

In 2008, the “Theory of 1,000 real fans” was put forward by Kevin Kelly of Wired magazine. The theory holds that 1000 real followers is all an artist really needs to have a successful, if unspectacular, career. Actually, Kevin Kelly had outlined something that what would be called a “passion economy,” where the focus would be more on growing audiences or strengthening relationships with customers, and building a depth of following.

Companies with strong network effects

As mentioned before, platforms such as Facebook, Twitter and LinkedIn have all successfully exploited network effects. In today’s digitally connected world, social networks, multiplayer games and sensor networks are three examples of business models with strong network effects.

For social networks in particular, individual posts are the glue that results in a network of followers who are both content producers and consumers – feeding on things like virality. Subscribers connect to and communicate with their own networks, which are based on the user’s unique identity through Personal Networks. Each additional node in the network serves as a new potential audience and as a new content producer for all other nodes.

A user’s social graph and physical connections in a personal network are typically closely correlated. In fact, the personal network effect comes from the interpersonal, tribal impulse to connect with others. Companies will advertise products and services to match the influx of users and capitalize on trends.

Network effects in decentralized network structures

Since blockchain applications such as cryptocurrencies are a natural element of the new global network, they are fundamentally changing its nature. They are programmable and not limited by space or time. More importantly, now that the world is more connected than ever before, things like software currencies more easily reinforce the “belief” network effect that gave earlier types of currency influence.

Network effects make a product or currency more useful as more people join the network. Since the majority of people still have doubts about cryptocurrencies, to understand something like Bitcoin’s current and potential value, we can start with the only four innate defensibility of the digital age, namely network effects, brand, size and embedding. The largest of these are, of course, network effects built on a network of faith in this context and are Bitcoin’s primary network effects.

The challenge of bots

Social media bots are automated programs that work autonomously, falsely increasing the number of followers in a network. Bots make up a large percentage on all social media accounts. Twitter executives have testified that at least 5% of Twitter accounts are driven by bots, while experts estimate the percentage even higher. They can seamlessly replicate human accounts.

While artificial intelligence has revolutionized society and contributed to many positive things, the fact that AI-powered bots can pass for humans on social media results in a number of challenges for both individuals and societies in general, especially when we the power of network effects on business.

Research has found it that a number of misinformation leaks are affected by bots, most notably during the 2016 US presidential election. A Microsoft survey found that at least: 57% worldwide encounter fake news online.


Network effects and their business impact will continue for decades to come. It is important that companies are educated on this topic to make the most of network effects and predict future hurdles such as bots and decentralization. Business Council is the leading growth and networking organization for entrepreneurs and leaders. Am I eligible?