How Tech Firms Use Networks to Beat Rivals

Companies like Facebook and Google benefit when more users join their network, reinforcing their competitive advantage

Brian Colello, CPA 24 October, 2017 | 10:49AM Ali Mogharabi

Facebook has built its market value on the network effect

The network effects is when the value of a good or service increases for both new and existing users as more customers use it; the more existing users there are on a network, the more attractive it becomes for newcomers.

Networks can be direct, such as Facebook (FB) where users lead to more users, or indirect, for example Google (GOOGL) where user searches create more data, which leads to better algorithms and better future results for all users. Marketplace and platform companies such as eBay (EBAY) and Microsoft (MSFT) have also built powerful networks over the years. Amazon (AMZN) has a powerful network effect in online retail.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Alphabet Inc A1,434.41 USD0.81 Inc3,068.51 USD1.61
American Express Co95.92 USD0.49
Apple Inc111.45 USD2.98
eBay Inc52.30 USD1.00
Facebook Inc A253.29 USD1.50
Mastercard Inc A330.57 USD0.72
Microsoft Corp207.45 USD2.10
Netflix Inc480.61 USD1.59
Snap Inc Class A24.54 USD0.88
Twitter Inc43.40 USD0.59
Visa Inc Class A196.85 USD0.68

About Author

Brian Colello, CPA  is a senior stock analyst with Morningstar.

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