One of the strongest competitive advantages in the business world today is network effects. At a high level, this generally means that as a company gains additional users or customers, the product or service improves for everyone else.
While easy to comprehend, investors often mistakenly believe internet companies automatically possess this trait. Two popular companies in particular, Netflix (NASDAQ:NFLX) and Peloton (NASDAQ:PTON), are widely thought of as businesses with network effects.
But there is more to the definition I gave above. Let's dive in and understand why the misconception exists.
Why Netflix and Peloton don't have true network effects
Netflix and Peloton actually own the means of production for their products and services. The streaming entertainment giant spends massive amounts of cash ($17 billion this year alone) to enhance and expand its vast content catalog. And the at-home fitness pioneer chooses which trainers to work with, what classes to offer, and what equipment to design and manufacture. The end user, whether it's someone watching TV or an exercise junkie, has no direct connection to that process for the business.
Compare this dynamic to companies like Uber, Airbnb, or Etsy with true network effects. All three of these companies simply facilitate a connection and transaction between users of its marketplaces. Uber doesn't own the cars that ferry passengers around the world. Airbnb doesn't own the properties that host millions of travelers every...
Read Full Story: https://www.fool.com/investing/2021/08/23/netflix-and-peloton-do-not-have-network-effects/
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