WEBVTT

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In this video we're going to talk about the benefits of the network effect.

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When a business has the built in ability to both grow and improve as it gains more customers it is said

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to benefit from the network effect.

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In these cases the more people who use a certain business the bigger its market share gets but more

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importantly the more exclusive it's hold on that share becomes.

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This is simply because having more users translates into a more valuable product or service for all

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and inherently leads to a never ending cycle of continuous growth.

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The network effect is an extremely powerful type of competitive advantage and its most often found in

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businesses based on sharing information or connecting users together.

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You dont see it much in businesses that deal in physical goods.

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Examples of this can be seen in companies such as eBay visa and Facebook.

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The more people who use these particular services the better the experience becomes.

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Which leads to more people using the services the network effect gives a company a lot of advantages

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over its competitors.

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Looking at Facebook for example Facebook becomes more and more profitable when more people use it.

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You know what Facebook has access to a database of billions of people around the world.

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So this means they can easily make billions of dollars just by utilizing their customer base.

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You see the network effect makes it hard for other companies to compete with Facebook because if they

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want to enter a competition they must spend a lot more money on advertising and a lot more effort on

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reaching more people and showing their products.

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In the case of Facebook they can reach billions of people without any hassles.

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You can guess who will win in this game.

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This competitive advantage can be difficult to dislodge once it gains momentum and so it offers a potentially

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enormous economic moat to the lucky company or two that managed to establish the first successful networks

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in a particular industry.

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So make sure that you look for companies with a strong network effect.

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They are always winners in their industry.

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In the next video we'll talk about how a company can create an economic moat by commanding high switching

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costs.

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OK see you in the next video.