What is a network effect?
• A network effect describes how a service becomes more valuable to its
users as more people use that same service
Phone’s utility is limited if The utility for a user According to Metcalfe’s
the network is composed raises if the network law, the utility(U) of a
of 2 users broadens network is proportional to
the square of the number
(n) of its users
U ≈ k*n2
Network effects creates critical masses of users.
They represent significant barriers to entry for competitors.
December 2008 • Everything you always wanted to know about Google… • 27