Do Network Effects Still Drive Connectivity Business Moats?

Theodore Vail and Bob Metcalfe are among the entrepreneurs whose thinking has implicitly or explicitly relied on the notion of network effect, the increase in value or utility that happens when more people use a product or service. 

source: Medium 

James Currier and NfX argue there are some clear different types of network effect, which they argue drive 70 percent of the value of technology companies. That is reason enough to understand the principle. 

Essentially, network effects create business moats; barriers to entry by rivals. But some may argue that “network effects” are overrated sources of advantage. 

Are network effects explainable some other way? Can “economies of scale” explain advantage? Are the supposed advantages of network effects explainable by something else?

Perhaps “platform” is a way of explaining the success of a business model otherwise considered to be anchored in network effects. “Even among the companies that have come to define the sector--Facebook, Amazon, Apple, Netflix and Google--only Facebook’s franchise was primarily built on network effects,” some argue. 

Might  “viral” status, “branding,” “switching costs,” critical mass or other advantages explain defensive moats? It might not be so clear.  

When the network itself--the number of people one can reach on a particular communications network, for example--drives value, that is an example of network effect, somewhat clearly.

As an example of a business moat, Theodore Vail, the chairman of AT&T, said in 1908 that “no one has use for two telephone connections if he can reach all with whom he desires connection through one. 

In the connectivity business in the internet era, one might actually question the network effect to a large extent, since, by definition, every customer or user can reach any other lawful user without regard to the particular details of access network supply. 

As important as network effect might have been for monopolist AT&T, it is unclear whether such advantage still is possible in the internet era. Scale arguably continues to matter. But network effects? Unclear.