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
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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 A2,827.36 USD0.15Rating Inc3,409.02 USD3.31Rating
American Express Co175.81 USD2.51Rating
Apple Inc144.84 USD0.75Rating
eBay Inc74.90 USD0.29Rating
Facebook Inc A324.76 USD-1.15Rating
Mastercard Inc A356.00 USD3.31Rating
Microsoft Corp304.21 USD0.48Rating
Netflix Inc628.29 USD-0.87Rating
Snap Inc Class A77.34 USD0.91Rating
Twitter Inc62.77 USD-0.63Rating
Visa Inc Class A230.99 USD2.58Rating

About Author

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