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
Rating
Alphabet Inc A2,680.70 USD0.77Rating
Amazon.com Inc3,699.82 USD1.18Rating
American Express Co172.61 USD-0.33Rating
Apple Inc148.99 USD0.29Rating
eBay Inc73.26 USD-0.38Rating
Facebook Inc A372.46 USD0.72Rating
Mastercard Inc A392.80 USD-0.12Rating
Microsoft Corp289.05 USD-0.21Rating
Netflix Inc516.49 USD0.21Rating
Snap Inc Class A76.32 USD-2.12Rating
Twitter Inc68.69 USD-4.18Rating
Visa Inc Class A250.25 USD0.49Rating

About Author

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

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