A net­work effect is “the effect that one user of a good or ser­vice has on the value of that prod­uct to other peo­ple”. When there is a pos­i­tive net­work effect we say that the good or ser­vice in ques­tion increases in use­ful­ness the more users there are, like the tele­phone or online social networks.

Of course, being in a busi­ness or sec­tor that relies on pos­i­tive net­work exter­nal­i­ties brings with it one inher­ent prob­lem: get­ting to the socio­dy­namic crit­i­cal mass. Chris Dixon looks at six strate­gies for over­com­ing strong net­work effects; the so-called “chicken and egg” prob­lems.

  • Sig­nal long-term com­mit­ment to plat­form suc­cess and com­pet­i­tive pric­ing: Microsoft’s $500m pro­mo­tion of the xbox platform.
  • Use back­wards and side­ways com­pat­i­bil­ity to ben­e­fit from exist­ing com­ple­ments: Microsoft with DOS and Win­dows ver­sions, Apple with Bootcamp.
  • Exploit irreg­u­lar net­work topolo­gies: (Early) Face­book and JDate for social net­work­ing and dat­ing respectively.
  • Influ­ence the firms that pro­duce vital com­ple­ments: Sony and Philips influ­enc­ing Poly­gram for their CDs.
  • Pro­vide stand­alone value for the base prod­uct: Record­ing of tele­vi­sion on VCRs.
  • Inte­grate ver­ti­cally into crit­i­cal com­ple­ments when sup­ply is not cer­tain: Nintendo’s games con­soles with games funded by Microsoft and Sony.

via Ben Cas­nocha