When people first encounter network effects, they think there's a network effect or not. That's like saying there's life, and there's not life. There's actually different types of life and there's different types of network effects. Not all network effects are created equal. And we started studying and noticing this back in the 2000's, and when we got to 13 network effects, what we realized was we needed a map. So we've come up with a map to help us visualize the different network effects and where they all fit in in terms of their relative strength, what types they are, and delineating how they're different from each other. That was a few years back, now we're up to 16 network effects and we'll walk through all of them.

Physical (Direct)

The first time we saw a commercial application of network effects was way back, 1907. The chairman of the board of AT&T who was deploying physical phones and copper wires to connect them all together so they could talk to each other, said in his annual report, "You might want to buy our stock because when we go into a town and we get a few nodes and a few of these copper wire links, nobody can compete with us, and we end up taking all the business in the town. So in every town we get into, we own everything. We're probably going to have a pretty good business here." He noticed it, explained it, and gave business reasons why it was important and boy, was he right. This physical direct network effect, physical being the copper wires and heavy black telephones that sit in people's homes, this was the first commercial network effect discovered and it turns out to be the strongest network that we know of.

There's a whole type in the center of the network effects map, color-coded blue. They're known as the direct network effects, because every node can touch every other node in the network. The physical is the most powerful, because once you've actually embedded atoms in the ground, like if you're Comcast or AT&T and you're putting cables in the ground and connecting to people's homes, it's very hard to rip them out. It's possible Comcast has the worst NPS score of any major corporation in America, and they can afford to do that because we can't replace them because they have this incredible, direct physical network effect.

Protocol (Direct)

The second direct network effect, we call protocol. You can see this with faxes or ethernet or Bitcoin, where you develop a protocol, publish it widely, and everyone can now attach to this protocol, and the more people use that protocol, the more benefit everyone gets from that protocol. Even crappy protocols like fax are still surviving in the 2020's, even though they were invented in the '70's, because so many people are using that protocol network effect.