You're listening to episode 6 on case studies showing network effects in action from the network effects master class here on the NFX podcast. This episode is a montage of network effects in the wild that are under the hood of these top tech companies like Trulia, Meta, Uber, and even Bitcoin. For the best experience of this episode, be sure to watch these case studies at nfx.com/masterclass Omri by searching on YouTube to get the visual side of these deep dives.
Okay. So now that you defense abilities as well as the 16 network effects. Now my partners are not gonna walk you through a bunch of case studies so you can see how these things play out in action. In the real world, and I want you to pay close attention to how these defensibilities reinforce each other and how the network effects reinforce each other as you move through the seasons of building your company from tiny seed to giant impactful company in the future.
You're now listening to the network effects of Trulia. So it's the summer of 2004. I was, grad student at Stamford, and I'd just gone through a kind of painful home search. It was also the summer that Google went public. So the buzz in Silicon Valley was around Google. Now I got a ticket to a real estate conference, so I sat at the back of this real estate conference. And I remember driving from San Francisco back to Palo Alto. There was this kind of unique moment.
What if we applied this sort of Google search model to real estate? That was it. I was committed to it. So the core problem in a 2 sided marketplace is solving the so called chicken and egg problem. How do you get supply? Which drives demand? Which drives supply? How do you kick start this? The the first way we solve that problem was to index websites. So we'd go to brokers and say, Hey, can we index your website and put your listings on Trulia for free? To demonstrate the value proposition.
The other key network effect that we added was a data network effect, and we used the scale and data that came from my users to improve the user experience. Everything from a recommendation system. So just like Amazon, you like this home, you'll like these other James, So the protocol network effect was key for us in the early days, standardizing real time XML updates, bring in real time data from the fragmented MLSs and broker websites published on TRULIA.
We realized early on We would not take money on every household, but we got massive fragmentation, which makes it incredibly hard to to monetize. We focus on working with the biggest corporate clients in the industry. In Q2, Q3 of 2008, everything changed. This could be the most serious recession in decades. And that means life, as most Americans know, it is about to change, in some cases, dramatically. These large real estate companies were struggling.
They were laying off Pete, housing transactions collapsed. Our advertising agreements evaporated. Business was was in decline as every other real estate company out there. So up until the point, a revenue came from a small number of big franchisees, brokers, and mortgage banks, who were paying a lot to advertise with us. But when they crash it, their marketing budgets were just too far removed from the actual transaction for them ROI.
Looking back, this was a bet the company decision, because we had to change direction completely while the market was collapsing around us, and we were running out of But in the end, it paid off big time. We went from 0 revenue growth during the recession to doubling year over year, allowing us to go public in 2012 and merged Brazil in 2015 in a $3,500,000,000 deal to create Zillow group.
M and A helped to quickly increase defensibility of the core marketplace business, providing scale and moving to a more powerful kind of network effect defensibility. So I think of Zillow Group today as a company that has really evolved into something of a market network, which combines the core marketplace businesses that you think of as truly and Zillow, with a SaaS based tool, the premier agent app.
The 3rd component was the acquisition of dotloop, a transaction management platform, providing the network So you've got today this incredibly defensible platform, a market network for the real estate industry. You're now listening to the network effects of Facebook, now known as Pete. Facebook's really the big kahuna of network effect. And that makes them incredibly defensible.
I think there's some temporary talk about the policies of Facebook, but I think what's important in order see clearly is to really look at the mechanics underlying what makes Facebook Facebook. So 2004, Mark Zuckerberg wakes up with a personal direct network effect with real identities. Harvard didn't have a Facebook, so that's the gap that we were trying to fill. It was a very powerful form of network effect. But he immediately realized that he needed to add other defense abilities.
He then, as he expanded into other colleges, created a real bandwagon effect. Each new college wanted Facebook to come to it, and no one wanted to be left out. And Like, you know, this is pretty cool. Like, I thought this would work at other schools. And once that was rolling, he started to scale the business until in 2005, there were a series of big articles about him in the Wall Street Journal, New York James. You're establishing the brand of Facebook and the fact that it was a phenomenon.
He could then go back and scale up even more, including leaving just colleges and starting to take on the whole world. They saw the opportunity to create an embedding strategy, create software to allow Facebook users to log in to other websites, using their Facebook login. So hundreds of thousands of websites have now adopted this Facebook Morgan, and Facebook is now embedded in the whole ecosystem of entire web. It allows them to have an embedding strategy, which is very defensible.
Once they'd established several defensibilities, including the personal direct network effect, they were free to explore other work effects. I think Mark in in 2007 actually said something like I think that network effects shouldn't be underestimated with what we do. In 2007, they were to launch a 2 sided platform network effect very much like a Microsoft. So they opened up Facebook platform. By the next morning, we had so much traffic.
They were literally driving around the San Francisco go Bay with a U Haul truck begging and asking people for servers to handle all the growth. And that allowed entrepreneurs to build code that would run on top of Facebook, making Facebook even more sticky and providing more things for their users to do on Facebook. Ultimately, I think after 8 years, the activity there is quite low, but it was still a really good idea, and they might return to that idea over time.
Then they started working on a 2 sided marketplace effect. Which with the media companies that were advertising on them, they built out wonderful self serve advertising tools, much as Google and Craigslist had done before them, but access saying such an active and large audience. Your customers are on Facebook every day. The world has gone social. Be part of the conversations. 23 or 20 percent of all the ad revenue spent online comes through Facebook.
But with all the traffic that they had, they started developing a data network effect, impacting Facebook in three ways. 1, they've got so much content that they can choose better content to show to me. 2nd thing is that the number of human engagements they have with the content, the likes, the shares, the comments. These things actually add value because of that data that I'm getting.
And the third thing they have on the data side is the real time data of all the activity on the site allows them to adjust and update the value of my feed and real time as much like James will So in 2011, they launched Facebook Messenger, which actually has utility when it's often about getting things done. And then in 2014, they saw what app. And WhatsApp was this personal utility direct network effect? It says it has 450,000,000 monthly active users.
Even just independently, I think it's it's quite a good bet. And they resolved that they would pay whatever it took. Facebook will pay $19,000,000,000 in cash and stock. And it also made them double down on Facebook Messenger by hiring in whoever it took to make that the best product it could be and to grow it from a 100,000,000 to over a 1a half 1,000,000,000 today.
And so between 2011 2014, you can see them really doubling down on the network effects and being very smart about not Pete somebody else with a network effect Pete past them. So in their continued pursuit of network effects, in 2016, Facebook relaunches marketplace. They had tried classifieds in the past several James, and it hadn't taken. But this time, it seems to be working, and they report over 500,000,000 users year. And so this is going into the area that Craigslist has owned for years.
They've been impenetrable, but perhaps Facebook with their real identity and the frequency of use they have might be able to pry that mark and open. So this makes Facebook the big kahuna of network effects. They've understood it all these years. They've built products that are excellent at developing their network effects. This company is not going anywhere. Are there threats to the company? Sure, of course, there always are.
The major one that that that we see right now is literally just government action. So if there is a threat to Facebook, we see it coming possibly from 3 directions. Now the first would be if Facebook becomes a public health concern in the same way that tobacco is. Because of addiction and depression and anxiety. There's also a privacy issue, obviously, with Facebook, you know, with the GDPR in Europe, you could see that taking effect in Europe and then bleeding over into the US.
And then the 3rd direction could come from the antitrust direction with Facebook being so dominant. You could see the Department of Justice and potentially asking Facebook to divest itself of Instagram and WhatsApp. But beyond that, it's hard to see because it's hard to break up these interconnected software products. If there is another threat, there's negative network effects.
There's so many people there that it pollutes the experience or keeps it from being cool, like when older relatives join Facebook and commenting on your photos. We've already seen that a lot of James don't use Facebook, but I think with good product design, it's it's a solvable problem. As a media company, Facebook is very unique because they have amenity to many direct network effect.
All the media companies that came before, like television, radio, magazines, these were one to many network effects, 2 sided marketplace, if you will, not nearly as strong. If you see clearly what the mechanics of what Facebook has done and you see past the noise. You can see that Facebook is as strong as ever and getting stronger. You're now listening to the network effects behind Bitcoin. When we had metal technology, we made money out of metal.
After metal, we had paper technology, and so we made money out of paper. Humans tend to do this. And now, of course, we have software. We're not just keeping track of money with software, we're making money out of software. Bitcoin was the first to do it in a decentralized way. This is the reinvention of money yet again, regardless of what it's made with. Money is simply the distillation of a shared confidence in the future. It's what we call a belief network effect.
Money is simply a belief held by a lot of Pete, a collective trance, always in the past, Beller in a currency formed around a hierarchical network topped by a king or a queen in his or her armies.
A pharaoh and emperor czar, a president, And prior to the US civil war, there were hundreds of regional currencies operating in the US, each centered around one strong man, or another, with his hierarchy under For the hierarchical pack animal that we are, hierarchy with an alpha king on top is understandable by all the people in the network. And, thus, it's stable. That's why when the king issues a currency and tells people to use it, people believe in it.
This strong man backed Flint currency approach has worked for 6000 years or more, but with Bitcoin, it's different. Instead of a king or central authority creating the Beller, and then controlling the currency, Bitcoin doesn't have a hierarchical network structure with a strong man at the top. It's a decentralized network structure. The fact is the majority of the world is still skeptical of Bitcoin, and this is why. The asset itself is creating nothing. Watch out.
You all can do whatever you want, and I don't care. Okay? People aren't used to having currencies backed by a decentralized network. There isn't a hierarchy with a believable person on top to define what they should believe in. It's not the same pattern. To create the belief network effects necessary for the existence of money, hierarchical networks use power from the top, while decentralized networks use ubiquity.
Crypto changes the nature of money in a historical way because unlike gold or paper money, crypto is a native creature of the new global network. Unlike fiat currencies, it isn't constrained by geography or by time. This is a huge difference. Bitcoin's product is a currency and Morgan specifically, a store of value. Its currency doubles as, let's say, shares, and we can all buy and sell the coins as we would traditional stock.
And in this view, Bitcoin's market cap would put it in the top few most valuable companies in the world, like other network effect businesses. So Bitcoin has core defensibilities. And of course, there are only 4 defensibilities native to the digital age that Bitcoin might use. There's network effects, there's brand, there's scale, and there's embedding. Network effects are, of course, the greatest of these. So let's focus on the network effects map.
You can see the various network effects types and categories, organized by Beller with the strongest network effects at the center of the map. Bitcoin's first and primary network effect is a belief network effect. It's the same mechanism you see with gold and with religions. The more people believe it's valuable, the more valuable it gets for everyone. The more times its price crashes and then bounces back, the more people will believe it has lasting value. Yes. Bitcoin is a bit like sand.
It's not solid. But if you get a lot of sand and then layer some Ethereum sand on top of it and then the sand of the thousands of other cryptocurrencies in existence, The Bitcoin sand gets progressively more solid as a result of growing belief network effects, but was once fluid and intangible transforms into something closer to rock. The Bitcoin second network effect is a protocol network effect.
Protocol arises when a computational standard is declared, and all the nodes can plug into the network using protocol. Traditional examples are ethernet and fax machines as the number of nodes that connect to the protocol increases the network effect gets stronger. Bitcoin's 3rd network effect is a 2 sided marketplace network effect, and this is the 2nd most powerful effect for Bitcoin. And Bitcoin creates 2 form of marketplace network effects.
1st, a speculation between buyers and sellers of its store of value. Number 2, a payments marketplace. The more nodes on the network buying, selling, and holding, the better for everyone. Bitcoin's 4th network effect is a 2 sided platform network This is where there are developers adding their products to the Bitcoin platform. The developers receive distribution to users as compensation for building and adding value to Bitcoin.
Bitcoin also has a data network effect, a data network effect occurs when as the data in the network grows, the value of the data for each user grows. If Bitcoin's case transaction data is accreting on the blockchain in a way so that the amount of computation required to hijack the network increases. To increase the security for everyone and thus value for everyone. Bitcoin 6 network effect is a tribal network effect.
Now the main mechanism for tribal network effects is the creation of an in group and an out group so that the in group can know who to help and to be loyal to the outgroup typically turns into the enemy. There are now Bitcoin maximalists who believe that Bitcoin should be the only digital asset we'll need in the future and they actively denounce all other coins. So within the 5 years, Bitcoin will have 99% of the hashing power and 99% of the market cap.
Finally, Bitcoin 7th network effect is a bandwagon network effect. Now these bandwagon effects typically arise when people are jumping on early and not wanting to be left out. In Bitcoin's case, these early supporters were financially and ideologically rewarded for joining early. And as the value of the token has grown, people have been wanting to jump on and not be left out.
Because Bitcoin has the biggest worldwide brand in crypto and is the biggest market cap, the bandwagon effect is strongest compared to lesser crypto brands. Moving on to other forms of defensibility, Bitcoin has a strong embedding effect already because they are listed on all the exchanges where people trade crypto They benefit initially by being listed at all so that they can attract more users. But more importantly, because of where they're listed on the exchanges, at the number one spot.
For preferred attachment, this will tend to keep them number 1. Another key defense ability of the digital age is brand. Most people tend to be risk averse and avoid the unknown, so they are less likely to switch to an unknown or lesser known brand. Bitcoin is regularly conflated with the entire cryptocurrency face. Given its size, Bitcoin has competitors coming at it from all directions. First, the fiat currencies issued by nations, such as the US dollar and the Chinese yuan. Incumbents.
Number 2, they've got other digital currencies like Ethereum Cardano who are trying to take it down. And number 3, gold, traditional gold. Of course, there are some external shocks that might negatively impact Bitcoin's network effects. We see 3. First, fake trans 2nd risk is responsiveness of the Bitcoin Dow. The 3rd risk is government intervention. They are the winners. They're the incumbents. They're the winners of the old regime. Our opinion, it's too late for governments to stop Bitcoin.
The network math protects it. To sum up, cryptos here to stay The reinvention of money is underway. Bitcoin will continue to be a big part of that story. Bitcoin created and is now embedded into the crypto ecosystem and the world's consciousness. You're now listening to the network effects of Uber.
Companies build their value through defensibility in the long term, and there's only a few ways of doing it well in the digital world and through scale, through brand, through embedding, but the most important one is network effects. So we see network effects as the number one factor in defensibility, and there are at least 13 different types. The strongest ones are in the center of the Morgan, and they generally get less strong as you go out from the center.
Of the examples where it really matters is a company like Uber. So when Uber first got going, they thought that they had a real 2 sided marketplace network effect. But what it turns out if you look closer is actually have an asymptotic through side of marketplace network effect, which is not nearly as strong. To be clear, there are actually 3 different types of 2 sided marketplace network effect.
One is like Craigslist or eBay where the more people you have on both the sellers and the buyer sides, the more defensible the business becomes. Then there are places like OpenTable is where they had to collect a supply of restaurants for 7 years before they had enough to open up the marketplace. And then the 3rd type is the weakest type, which is an asymptotic one.
So after a certain point, more drivers don't significantly benefit the pesticide and perhaps your wait times drop from 4 minutes to 3 or to 2, the demand side value doesn't keep increasing as you move towards 0. Some other company like Lyft can come in, and they can provide a few hundred cars and can pick someone up in 4 minutes, they can also compete. Compounding the asymptotic problem for Uber is that there's multitenanting on both the supply and the demand side.
The drivers, it's costless for them to switch between Uber and Lyft. And same for the demand side, the the passengers. So because of the asymptotic nature of the network effect, Uber has had to get pretty creative in how they actually increase their defense ability. I mean, the first thing they tried was to grow their brain. I mean, they've done an amazing Jaho staying in the press for all sorts of reasons, so everyone knows Uber, everyone talks about Uber.
The other thing is they just raise incredible quantities of money, which allowed them to scale up and be everywhere. The other thing they've done is they've they try to embed Uber into things like Messenger and Google Maps. So by embedding, they're also getting an advantage to get on that demand side or or maybe even on the supply side. The other thing they've done is is they've really worked on language.
If you can get someone saying your name, like, I googled something or I took an Uber, that is giving you, social reason for people to continue to use that particular service. All these things have, I think, been very smart and they've effectively executed on it to try to make up for the fact that their core Pete effect just isn't that strong. You know, going forward, we'd wanna take Uber into a direction where you have much stronger network effects.
So getting into some of these more personal direct network effects, perhaps with Uber mute. Hoover's a great example of how you can use the network effects map to really tease out the differences between business element to the last 25 years, over 70 percent of value that's been created in technology has been created by companies with a network effect at their core. And so for founders, understanding this stuff, the the nuances here is a critical importance.
Stay tuned to the podcast as we'll post 1 episode per week until we complete the course. You can also watch this entire Masterclass online atnfx.com/masterclass. Where you can log in, track your progress, and watch full videos, retranscripts, and find other related material. Thanks for listening to the NFX podcast.