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Definition: network effect

The resulting increased value of a product because more and more people use it. Telephones, fax machines, computer operating systems and smartphones have been prime examples. A product's success is more about compatibility and less about its superiority to the competition. For example, Microsoft became hugely successful due to the network effect, because more and more people bought Windows PCs, and developers began to write programs for Windows only or at least much earlier than for the Mac version. In contrast, owing to the network effect, the company has also suffered, because although Nokia Windows Phones are excellent devices, they have a tiny market share compared to iPhone and Android, and fewer developers create apps for Windows Phones as a result. See tipping point and network externality.