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5 Essential Network Effects To Invest In The Digital Economy



  • Warren Buffett suggests that economic moats are more durable than competitive advantages.
  • Network effects, arguably the most powerful kind of economic moat, occur when a product becomes more valuable as more users join.
  • As the world shifts to digital, identifying companies with the right kind of network effects have become more relevant now than ever before.
  • In the age of software, market share growth can compound for those with the right types of dynamics at play in their business model.
  • Let's review five types of network effects with examples of companies that could easily justify a spot in your portfolio.
  • I do much more than just articles at App Economy Portfolio: Members get access to model portfolios, regular updates, a chat room, and more. Get started today »

In The Little Book That Builds Wealth, Pat Dorsey explains:

unless a company has some kind of economic moat, predicting how much shareholder value it will create in the future is pretty much a crapshoot, regardless of what the historical track record looks like. Looking at the numbers is a start, but it's only a start. Thinking carefully about the strength of the company's competitive advantage, and how it will (or won't) be able to keep the competition at bay, is a critical next step."

The term economic moat was popularized by Warren Buffett and refers to the ability of a business to maintain an edge over its competitors. A moat is a structural and sustainable competitive advantage that can drive long-term earnings and market share, which in turn is likely to be reflected in the price of the stock.

There are five main economic moats:

  • Low-cost production.
  • High switching costs.
  • Network effects.
  • Intangible assets.
  • Efficient scale.

Because of their compounding nature, network effects are often recognized as the most powerful economic moat. They are defined as the "phenomenon whereby increased numbers of people or participants improve the value of a good or service." Network effects are present for many businesses of the digital economy. In consumer technology, they are most commonly sought as a path for sustainable growth. Social media or e-commerce platforms are often recognized as businesses greatly benefiting from such moats. In many ways, strong network effects can reinforce other moats such as brand and scalability.

But not all network effects are born equal. They can take many shapes and forms. For marketplaces, the key is for offer and demand to increase in tandem. For platforms, the key is for users to remain engaged in the ecosystem. Network effects can expand an addressable market over time, but some businesses may reach saturation and

If you are looking for a portfolio of actionable ideas like this one, please consider joining the App Economy Portfolio. Start your free trial today!

The rise of the App Economy is disrupting many industries: retail, entertainment, financials, media, social platforms, healthcare, enterprise software and more.

This article was written by

App Economy Insights profile picture
Unlock a portfolio built to benefit from the rise of the app economy
My name is Bertrand Seguin. I'm a former PwC consultant and veteran financial executive in the video game industry. I've spent 12 years at Bandai Namco Entertainment, leading the Financial Planning and Analysis team in the transition to Digital, Mobile, and Game-as-a-Service. I hold a Master of Science in Management and Finance.

My portfolio is built to disproportionately benefit from the rise of the app economy, the range of economic activity surrounding mobile applications. My investment plan and asset allocation are a result of secular trends I have identified (macro) and in which I take individual bets (micro). I invest with a very long time horizon (ideally 10+ years).

I am fortunate enough to have seen my strategy deliver outstanding results throughout the years.

Discipline and consistency win the game over time. Unfortunately, many investors violate their own model or strategy when their portfolio performance is temporarily disappointing. I would rather sell too late than too early, so I tend to never sell. I let my winners compound to a significant portion of my portfolio and let my losers become insignificant over time.


All App Economy Insights contributions to Seeking Alpha, or elsewhere on the web, are personal opinions only and do not constitute investment advice. All articles, blog posts, comments, emails, and chatroom contributions by App Economy Insights - even those including the word "recommendation" - should never be construed as official business recommendations or advice. In an effort to maintain full transparency, related positions will be disclosed at the end of each article to the maximum extent practicable. The premium service App Economy Portfolio is a research and opinion subscription. I am not registered as an investment adviser. The majority of trades are reported live, but this cannot be guaranteed due to technical constraints. Investors should always do their own due diligence and fact-check all research prior to making any investment decisions. Liability of all investment decisions reside with the individual investor.

Analyst’s Disclosure: I am/we are long AAPL, AMZN, BTC-USD, CRM, CRWD, DOCU, ETSY, FB, FSLY, GOOG, MTCH, PINS, TCEHY, TWLO, V, WORK, Z. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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