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Part I.Why Network effects Are Important

Network impacts are instrument in a product and business whereby every new user makes the product/service/experience more valuable to every various other user.

Network results are important due to the fact that they space the best type of defensibility, and thus value creation, in the digital people (the 3 other major defensibilities space brand, embedding, and also scale).

As mentioned above, network results account because that the majority of value created in the modern technology industry in the past few decades, since many winner-take-all-companies in technology were powered by network effects.

Not every network impacts are the same, however, and understanding the nuances is crucial for building network results of your own right into your products. Different types of naipublishers.com space stronger or weaker than others, and they each work differently. To day we’ve established 13 various kinds of network effects. They’re noted as adheres to in order of strength:

### Sarnoff’s Law

David Sarnoff was a titan of transfer era radio and TV, that led the Radio copy, group of America (which created NBC) native 1919 till 1970. That was one of the largest networks in the world during those years. Sarnoff observed that the worth of his network appeared to boost in *direct relationship *to the dimension of the network — proportional come *N, *where *N *is the total number of users ~ above the network.

As it turned out, Sarnoff’s summary of network value came to be an underestimate for some types of networks, although it was an accurate description of broadcast networks through a few main nodes broadcast to countless marginal nodes (a radio or television audience).

### Metcalfe’s Law

Metcalfe’s law states the worth of a communications network grows in proportion to the square the the variety of users top top the network (*N*^2 where *N *is the total number of users ~ above the network).

The formulation the this concept, which dates to about 1980, is attributed come Robert Metcalfe, that was among the inventors that the Ethernet standard.

Metcalfe’s regulation seems to hold because the variety of links *between *nodes on a network increase mathematically in ~ a rate of *N^2*, where *N *is the variety of nodes. Although initially formulated come describe communication networks like Ethernet, fax, or phone networks, through the come of the net it has evolved to describe social networks and also marketplaces as well.

### Reed’s Law

Reed’s law was published by David P. Reed that MIT in 1999. If Reed acknowledged that “many type of value flourish proportionally to network size” and that some thrive as a proportion come the square that network size, he argued that “group-forming networks” that allow for the development of *clusters *(as defined above) range value even faster than various other networks.

Group-forming networks, according to Reed, increase in value a rate of 2^N, wherein *N *is the total variety of nodes on the network.

The reason why Reed argued a formula that 2^N rather of N^2 is since the variety of possible teams within a network that “supports easy group communication” is much higher than 1, so that the total number of connections in the network (the network density) is not simply a function of the total variety of nodes (N^2). In fact it’s a duty of the total variety of nodes *plus *the total number of possible sub-groupings or clusters, which scales at a much much faster rate with the addition of more users to the network.

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Since most online networks allow for the development of clusters, they will most likely behave at the very least somewhat together Reed’s regulation suggests and grow in worth at a much quicker rate than either Metcalfe’s law or Sarnoff’s regulation suggest.