Hamilton Helmer: evaluation

Transcript context

…We teased earlier that we were going to talk about the difference between network effects and network economies. This is something that David and I have flubbed on a few episodes where I think I've conflated them in our power section. I'm curious, what are some telltale signs of a company that has network effects but did not develop network economies power? I think network effects in the types of things that we've been talking about in this episode are common. When a driver joins Uber, he makes the platform more valuable to passengers because more efficient route structures are now enabled. That's a network effect. Things that happen there are somebody joins the network, that's the network part, that's the new driver joining. Something happens to somebody else in it that has a value implication. That's the effect. That's a network effect. The question is, what would you like to call network economies? That sounds like an odd thing to say, but that's really the question. You could say anything that there are network effects and there's power. You could call it might be one choice, and Chenyi and I are currently debating this. There's another choice, which is the one that I'm currently going down, which is that it's when there's power from direct network effects. A direct network effect is where you're joining has an immediate value impact on somebody that's on the same side. I joined Facebook because I'm your friend, and those effects are strong because they're additive. Another friend joins, it doesn't substitute for the one that just joins, it adds to it. Those kinds of effects that do more lead to winner takes all kind of situations. My naming choice right now is if there's power as a result of direct network effects, and that's in our economy and those aren't very common, I'd say indirect network effects like the one in Uber are much more common. It's just a value impact. That's the benefit side, but as you two well know, you need both a benefit and a barrier side. Is it arbitrable? Then you have to get to the much rarer set of cases where there's a benefit, it's material, and also it's barriered and then that's a much, much narrower set of things. Do you want to add something? I'm hesitant to drag David and Ben into our whole debate. I think the short version of things here is network effects describe only the value creation. It's a statement without consideration about competition, which the latter is all power is about. Regardless of how we end up defining network economies, it is the type of platform that we believe has power that's differentiating from network effects on its own.…

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