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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 are prime examples. A product's success is more about compatibility and less about its features. For example, Microsoft became hugely successful due to the network effect. As more and more people bought PCs, developers wrote programs for Windows only or at least before they wrote a Mac version.

In contrast, Microsoft also suffered due to the network effect. Although its Windows smartphones were very innovative, by the time they debuted, iPhones and Androids were selling fast, and BlackBerrys had been around more than a decade. As a fourth smartphone platform, Windows Phones could not compete due to the network effect. See Windows Phone, tipping point and network externality.