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Network effects “create category kings”

Five-sixths of the market value generated by leading tech players comes from businesses driven by “network effects, according to new research by global investment firm Battery Ventures.

The “network effect” is the phenomenon of a product or service becoming more valuable as more people and partners use it. Network effects are an important element of platform business models, which are underpinned by technology platforms.

The network effect is a key feature of prominent companies such as Netflix, Alibaba, Uber and Airbnb and more.

A blog post from Battery Ventures notes, “Our recent analysis around network effects found that they are, in many ways, more potent than many of us have thought: They lead to more efficient sales-and-marketing activity; create strong barriers to competition, and can lead to explosive growth as a category king’s base of users grows at a fast rate.”

Category kings

“Category kings” are defined as market-share leaders in particular business sectors, who often wind up creating the majority of the market value relative to their competition. This advantage is particularly pronounced in technology. According to recent researchover 70 percent of the value created in technology markets is actually generated by the category’s king — think Amazon.com in retail, Facebook in social media, etc.

Battery Ventures has launched a new index to track the stock performance of consumer marketplace companies and social networks, including large global brands like Facebook, Alibaba, Yelp, eBay and OpenTable.
Battery Network Effect

 

The company said it wanted to “quantify the specific value of network effects in consumer-technology markets, particularly among category kings.”

The Battery Ventures Network Effect Index — which includes 32 current, publicly traded companies and four former public companies that were acquired in the last several years — highlights companies that exhibit “profound network effects”. All of the companies were worth at least $1 billion as of December 31, or at the time of their acquisition. The combined value of all the companies in the index is $1.08 trillion.

According to Battery General Partner, Roger Lee, stocks of the companies in the index have together risen by 161 percent in the last five years, as of December 31, and also outperformed the S&P 500 Index by 84 percent in that same period.

battery Index

 

“That means if an investor had put $1,000 into this basket of ‘network effect’ stocks in 2011, he or she would have about $2,606 today,” he says.

Platforms are the place to be

Clearly platforms, which generate network effects, are the place to be, but it’s probably less clear how your company can participate in and benefit from this revolution.

TM Forum is developing a platform architecture for the communications sector called the Digital Platform Reference Architecture (DPRA) to help operators expose their rich and vast networking capabilities as platform providers.

Our new free ebookaimed at the telecommunications industry, explains more and will help you understand your role in the platform economy and how to get started.



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Freelance Writer and Editor

Sarah is a freelance writer and editor with an interest in new technologies and how they impact our everyday lives.

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