"Network effects" occur when tools and services get more valuable as more people use them. Telephones, fax machines and email are the most obvious examples but network effects drive many successful businesses. New users pick Microsoft Office because it is what most employers want to know, and the more people who use the Office file formats, the easier it is to share documents. Thus, network effects don't just bring you new customers, they make what you sell more valuable to old and new customers alike.
Tim O'Reilly thinks that is the key for open source and Internet businesses. "What really matters is the architecture of systems: open source is ultimately about systems that create and manage and magnify network effects."
That means if you design the system right, you won't need to to the hard work yourself: your users and partners will do it for you. Not because you are paying them (like Yahoo's editors) or out of the goodness of their hearts (like Wikipedia editors) but as a side effect of what they're doing for their own self-interested reasons.
Mary Branscombe -- "Share and ye shall find" in The Guardian Inside IT, June 24, 2004.
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