This is Kristin O'Brien, Managing Editor at NFX. And you're listening to the NFX podcast. We're talking about the power of network effects in this episode with Scott Cook, founder and chairman of Intuit and James Currier, partner at NFX. About 2 years ago, Scott came to NFX to meet with James and discussed their shared interests in network effects. It was one of the most compelling conversations James has had with anyone on the topic.
So today, we're at Intuit Headquarters in Mountain View, California to continue the conversation and make it public for the benefit of founders everywhere. Today, Scott Cook and I are talking through a network effect And, you know, the audience, Scott, is founders and mostly early stage founders. And so they're looking for practical tips, tools, stories, details and, of things that they can use in their daily lives.
And, you know, 2 years ago, you and I had a chance to discover that we're both network effects wonks, right? We're students of network effects, and, we had a great talk about them in detail, and There aren't that many people actually who have spent the time as you have to figure out the nuances and how they work. And that sort of thing.
And so I just thought it would be great for us to almost recreate our discussion about, about network effects so that founders could benefit from the sharing of, of some of the details about this stuff and some of the thinking. And just to set the stage, so founders understand, are you investing? Are you in your family office still investing in companies? Oh, we do some. In the pre k education field, we do a lot as much as we can find. As that's our kind of philanthropic purpose.
And then on the side for personal portfolio, you have 1 once in a while. Once in You know, and and is there a particular type of thing you're looking for? Companies with network effects, companies. Oh, gosh. You're always looking for companies with network effects. Yeah. Generally, they won't be at the earliest stage because that's preestablishing of a network effect, but so they might be even when there's some evidence of market traction, and then a team in a business you can believe in.
Got it. Got it. And you've talked a lot about the need for founders to have their durable competitive advantages long term. What does that mean to you? You know, maybe there was a time when you could start a company and not have to worry about competitors.
But in the world we live in today with giants that have such speed and agility and resources, whether it's Facebook, Google, Amazon, whether it's other startups, the vibrant startup infrastructure, you gotta assume after gonna be other people trying to do the same thing as you, either at the same time or once they see that it's successful. And if you don't have a source of durable advantage or you're a roadkill, all that work goes to nothing and you had crushed.
Yeah. So I don't, and then, not only to survive, but to thrive, the size of your profit stream is largely a function of your size of durable advantage because if you don't have durable advantage, you'll have 18 competitors and they'll compete it down to, no economic term. And what forms does that durable advantage take? I mean, you know, one of the things that we did, we we published, a perspective that in the digital age, there's sort of 4 major things.
If you discount IP, you know, particularly in software, it's tough to use Pete. But you've got brand, you've got in, you know, embedding where, you know, like an Oracle will embed their software in a company. You've got scale, like an Amazon just gets scale so the prices get lower. And then you've got network effects. And we kind of posit that network effects are the greatest of the 4.
Do you have any way of looking at durable advantages like that that might be a framework that the founders could learn from? Yeah. It's similar. And the conclusion is exactly the same that the the one biggie, the giant in the room, our network effects. The others all have their flaws. So a traditional one was, fixed cost scale leverage But the that assumes that nobody else could put the fixed cost in.
Well, today with the tech titans out there, they can put the fixed cost in in a wink, in a blank. So fixed cost scale leveraged assumes a capital constrained world and we live at least in tech with companies that are seemingly capital unconstrained. So that doesn't have the power it used to. One that gets some discussion is, switching cost.
You know, there was a time when certain companies would have unique access to a source of supply like De Beers with diamonds, but, boy, you don't tend to see that anymore. And, So The assets of the new economy is just data and software, and all that moves very easily. And brand, I think, is, is not a worthy defense at all. I've seen companies with phenomenal brands get crushed in a matter of years. I mean, go back to times that we remember in the early age of PC software.
The best brands in the industry were Lotus lotus 123, word perfect. And Microsoft just crushed them in a matter of years. And they had the brands. So I don't think brand buys you very much. I mean, the best brand in search was you name it Alta Vista or maybe Yahoo and their roadkill. So I just don't think brand matters that much anymore.
It's too we I mean, In in if you go back, if you look where brand used to matter, I was in, say, consumer household products, like those made, appear on a grocery or drug store shelf. And those are product categories where the consumer already has been using the product for years just ran out has to rebuy the price only costs three bucks. They walk by that shelf twice a week. Okay?
All you have to do to get them to try your brand is get them they're gonna out toward the shelf and they just have to move their hand 20 centimeters to pick up your brand. Yeah. Okay? Maybe brand image could make someone who's gonna buy anyway, move their hand 20 centimeters to buy your brand. But we're not talking about that world. We're the world we live in, and there's there's no one's walking by a shelf. They didn't just run out of your product. You're trying to get them to do something new.
Generally, if they've never done before, that's so I I just don't think brand is, Beller much advantage nor is it much of a defense anymore. You need something more powerful. These network effects? Yes. Are there other things other than network effects that you like to to rely on, or, or really are you focused on that? Well, if you it's not something you'd like to write. There are brief times when if your idea is sufficiently different.
Well, actually, let me speak to one source of invention that still does work. Yeah. But they're rare. And that is Oh, I think there's an HBR piece that calls it, a multi factor process advantage. So this is something where you have a method of production that is very different than the rest of the industry and very hard to copy because it differs on so many attributes, such as Southwest Airlines, Yeah.
Southwest Airlines has been the best performing US airline for 30 years, and they use their labor different. They capital different. They just there are so many differences between how they operate versus a normal airline. And the other and the other airlines are hide bound union constrained, and so they just can't copy the superior method. So Southwest has retained a fairly durable advantage. The Toyota production system is another.
And the Toyota makes cars in the plant in a way that's fundamentally different than procedures used in normal auto plants. And and famously, they've allowed the other car manufacturers to come into their factories and videotape and spend as much time as they want, and they're they're incapable of and GM had a Toyota factory in the GM, footprint in the United States. I had all the data and visited.
I'd learned about this in part from a GM and executive who was flying out from Detroit to visit the, new me plant that was here in the Bay Area. And the other automakers essentially haven't copied well. And you can see, companies like Danaher and Fortive who've copied the Toyota production system and reapplied them in their industry. I mean, Danaher has a stock growth track record much better than SAP, on par with Intuit's stock growth since we went public. 25 years ago.
And yet, Dana, who works in industrial products and test equipment for factories, not sexy businesses at all. But they've applied this multi factored, process advantage to real advantage. So that, we might even look at an Apple or an ad as Amazon. Might be I would say Amazon has built a multi, factor process advantage in software development. The speed with which they can move and innovate in a large it used to be.
You build a large software company, and you Pete slow and stupid and non innovative Amazon's kept speed and innovation, rampant innovation Pete size. So I think there's something going on there special, but those are rare. Few companies, develop that. That's about culture and about hiring. It's about a real determination to do things different. Right. And a real invention of a better way that work that's Yeah. Generally totally against the way the rest of the world works. Right.
So that's just not gonna happen very often. Yeah. That's right. But it's powerful. And those how bad I think continues to work. Flint Intuit have network effects at the beginning, and does it have network effects now? Yeah. I would say in, for all of my work and study of them, we don't have the strength and network effect position that I wish we had. So we were a paradigm difference that allowed us to beat the competitors in the eighties early nineties.
And then we had enough scale that we had some scale advantages. And then in, In QuickBooks, we have developed a degree of, I'd say, a moderate network effect. In that accountants know quickbooks and prefer it. So they recommend to their clients. Mhmm. There's more bookkeepers who know quickbooks. So they recommend to their clients. It's easier for the client to work with an accountant if you're on QuickBooks because they use QuickBooks. So we would have a a moderate network effect advantage.
I would qualify that as Yeah. It's almost, it's probably not a a protocol network advantage, which is a direct network. Correct. But it's something like that, which is that there's some sort of standardization Yes. And through the labor pool Yes. That's taking place. Yes. Yeah. And this has a degree of switching cost, and the switching cost here is the cost to learn a new bookkeeping system.
Yeah. Just like languages, have high switching costs, because once you learn a language, it's so much easier to just use that one than learn a new one. This is not on the same scale of difficulty learning, but once you have learned how a a system works like QuickBooks much easier to keep using it than to have to learn arrival. Right. So there's that groove in. And then any new hiring manager is gonna be taught by the marketplace they should just hire a quickbooks person. Right.
Yeah. Yeah. So that's sort of a 2 sided protocols. Yeah. So we Pete a, a degree of what I'd call moderate effect of network effect there. Got it. And have you tried any others in the in the in the business? Have you thought of adding any other, like, a platform? I mean, I know Intuit has a platform. Yes. And and I, we do have developer platform Morgan built around QuickBooks. The And I'd say, again, that's moderate.
We, you know, there's more systems that hook into quickbooks, less quickbooks if you adopt it, gives you more data access and and interaction that's automated with other systems. So I'd say again, that's a moderate level. We've tried to make that stronger, and, I think maybe we'll discover out how how to make that stronger. But I have to say I didn't I wanna ask how you first discovered network effects. And became aware of them. And then I'll describe it.
Wasn't that Flint it that I discovered the power of network effects. It was elsewhere. So first time did you get it? Yeah. So we started a company 99 that did not have network effects. And in the end, we sold it to a company that did have network effects.
And when we got over there and saw how bad their management was, And they still had a $7,000,000,000 market cap, and this was monster.com, that the fact that they still had $7,000,000,000 market cap, and they were running it so poorly And no matter how they try to screw the company up, it still continued to chug along and produce a $1,000,000,000 of revenue and and be worth so much that they were buying us. Not us buying them. It was a real shock to us.
And so that was 2004 when we sort of said, woah, this is a whole different paradigm. This is really durable. You can make all sorts of mistakes. You go to sleep and wake up in the morning and your company is just bigger than it was before and more powerful than it was before. So everything we want wanna do going forward is gotta have these things. And so we started becoming students at that time.
And, it's taken probably a decade to start tease out all the different types because we've we've heard about Metcalf's law, and that that only relates to direct network effects. But then there are these 2 sided network effects. Like the one you described that Intuit has with the labor market or a marketplace or a platform network effect or an asymptoting marketplace network effect. There's a several of these two sided network effects that are different from Metcalfe.
And there's there's a whole region around, you know, data network effects that just haven't been measured or discussed yet. And so it's taken us all this time to sort of tease all that out. But how about you? When did you first discover these? It was in the late nineties. I some crazy reasons managed to be on the board of Amazon and eBay at the same time. And eBay was it just defied explanation.
I I remember I first came across eBay when they they published books of Flint was the early days of the web. They published books that show the amount of traffic and and screens per pages per user for thousands of websites. I don't think it was a book was online, and I was just perusing to see which websites we're getting the most activity and particularly which we're getting the heaviest usage. And I was just scrolling down these pages online looking.
And most of the James per visit were in the 2 or 3 range. So people barely used websites back then. Then I ran across this thing called eBay, e b a y. And then I got a email from May Whitman, and she said, hey, Scott. I've just joined this company as CEO of eBay, love to come talk to you about you joining our board. I said, well, I don't know what eBay does, but I really wanna learn. So, you know, I found out this amazing thing. They opened up a retail store Pete did, and he left it empty.
He put nothing on the shelves, and the world came and filled it up with merchandise. Because it was kind of the original 2 sided network executed marketplace done in software. And it just amazing how the thing grew. Then, I was, John Morgan. I worked skiing in, Aspen, over Christmas. And Jeff Bezos emailed us saying, hey. I'm in town. I'd like to take you guys to dinner. So, we left our families. We had dinner with Jeff, and partway 3 said Jeff, so why'd you invite us to dinner?
He said, well, I want you both to know that we have been secretly building our eBay killer. And we didn't want you to know, Scott, because you would have a conflict with that, but we will launch it on Tuesday. And I'm sure you'll wanna, of course, leave the eBay board because, you know, they're gonna be toast. But, so I wanted to give you that heads up. Nice. Very kind of him. Yeah. Very, very much. And so I said, well, Jeff, you know, your competent you know, how I love what you're doing.
Amazon's phenomenal, and you have, truly have vanquished a number of competitors around you. And around you 359 degrees, you have mediocre companies as potential places categories you could Beller. Except one, we have a company with a powerful network This is not gonna end very Beller. But he was undaunted by my advice. And So then I watched what happened.
And it turns out that within a matter of a couple of months, the 2 most powerful companies in the digital world, which at the time were Yahoo and Amazon, both decided to attack eBay with clones. And they had done excellent clones of eBay. In fact, the software was better. The sites looked better. They were, you know, these companies that eBay at the time looked kind of more like Craigslist.
And these two competitors from, had really slick working sites plus They're being advertised from the most powerful home pages in the business. For several months, Yahoo's home page, the most powerful page in the world did nothing but advertise Yahoo auctions. Plus a major pricing advantage. EBay at the time, take rate was around 6%. Of every transaction. The take rates at Amazon and Yahoo were 0. It was free.
So you would think that a free competitor averaged and delivered by the most powerful entrance in the world would crush little eBay. But in fact, the reverse happened. They bounced off. Nothing happened. EBay kept growing. Those guys couldn't get traction. Even though they were free and eBay charged 6, you know, 600 basis points. So, and I said, that got my attention saying there's something more powerful than I've ever seen in business.
And then you started seeing the, you know, Intel Microprocessor, the Microsoft operating system word and excited Microsoft Office. You started seeing these, all of a sudden, the picture came together of there's a number of companies that have built some phenomenal competitive advantages where no attempt to disrupt them has had any effect and where their share positions Pete closer and closer to a 100. This is an effect the world has never seen before. Right.
Except in a government granted monopoly. Correct. Which is are increasingly rare nowadays. Mhmm. So that's what got my attention. And then I started studying them in earnest. And that was sort of late nineties early 15th. Yeah. 98. And did you stay on the Amazon board or the eBay board? Ultimately, I had to choose, because the company stayed rivalrous. And I elected to stay on the eBay board. Mhmm. Nice. Nice. With the network effect.
Now eventually Amazon has gotten very large and does have a big marketplace. More than 50% of their transactions are now in their 2 sided marketplace. But it just took 20 Yes. They decided to really embrace, the 2 sided market. The first merchant in the world Beller to do that. To really embrace after having been a merchant where they put the merchandise on the shelf, they embrace the two sided where other people put merchant in. Got it. So it was a mental shift that they had to make first.
And then when they came at it again in the late 2000s Well, they made it pretty quick. A little bit. I mean, here's the whole move Flint, Flint Amazon auctions was a move there. So Jeff got the Jeff is so smart. He got the mind shift early. He just had to work initially. They couldn't win by going head head first into eBay. They had to find a work way to work around that. I see. Okay. And have a differentiated supply. Yeah. Interesting. Interesting.
So, what was the most surprising thing you've ever learned about network effects? And these are great founding stories. And I'm still learning. There's so much. I think most of what we will know, we don't yet know. I'd say the thing that's been surprising is how small the founding teams are of some of the great network effect businesses today. Pete Omidyar worked alone to write and launched eBay, after what he says was a 3 day weekend of work.
So what's stunning is how tiny the teams were who built and launched the first versions of what became powerful network effects. Yeah. That's just, wow. The world's never seen something. We're so few can produce something of such a global strength, reach, and strength. Right. On the backs of this internet thing that someone else built for all of us. Yeah. But you can have small teams on the internet that don't amount to much. You can have big teams.
Yeah. Here's a it's that's been the biggest surprise to me. Yeah. Small. Which also speaks to the capital efficiency you can Pete from these companies, which implies greater returns for the employees, for their stock options, which implies greater returns for the investors. Absolutely. I mean, Pierre, up Pete that time, the investor, the investment that benchmark made into, eBay was the single best venture investment ever made in world history. But also think of Pete thing.
He, not only did he coded himself, he launched it himself, and he was the only employee for many months Only when so many checks came in that he needed help cashing the checks. Yeah. Did he finally hire somebody? So remarkable efficiency, both labor and capital, Yeah. Yeah. And with these marketplace network effects, these 2 side of ones, a lot of people have talked about the Twitter and the, the Facebook and the WhatsApp.
These are these are direct network effects where everyone's coming for the same thing. The one Twitter account is the same as another. One Facebook account is the same as another. But when I go to an eBay, when I go to, you know, to buy something on Craigslist or sell something on Craigslist, I'm, those are 2 different types of people with 2 different types of experiences. I'd love to dive into a discussion of how some of these 2 sided network effects work.
In more detail because you've got one going here Flint Intuit. You've been on the board of eBay a long time, and and you got to watch that grow up from the beginning. I think you know, the the 1-sided network effect or the the direct network effect has been sort of overdone, but the the two sided hasn't been nearly as, as much discussed. And I think that you know, that might be helpful to people to hear some of your thoughts about how you see those things playing out. Lots exchange thoughts.
So one part is that two sided, they're also n sided where there's more than 2 sides. So the classic one here is the Microsoft OS network effect. So say Microsoft Windows, where you had hardware makers, so makers of PCs, independent software developers, Consumers, the people who buy the machines, corporations, and consumers, and then you had Microsoft. So they were actually orchestrating 3 sides. And, the thing the consumer chose then drove the hardware makers, which drove the software.
And so they were able to orchestrate it three way. So, two sides is, one part of a what could be more complex. So that's the first observation. They need more than Sure. 2 sided. So what have you learned about? Yeah. I mean, we 2 sided. You know, the 2 sided network effects are more prevalent than 3 sided.
And in fact, I think the 3 sided are less, common than the end sided where you might have a market network where There's a whole bunch of different types of people that are inside of an existing offline marketplace that we then digitize. Through a website and mobile apps. And, the, the 3 sided is so difficult to get because They all have such strong independent ideas about what they want out of the marketplace.
And typically when you're building these 2 sided marketplaces, you basically are building 2 different companies at the same time. Okay. You have to satisfy the demand and you have to satisfy the supply. At the same time, in this, in the appropriate volumes, so that liquidity is achieved for both sides and people don't defect to someplace Beller. It's a very difficult plane to fly. And so flying that with 3 becomes astronomically even more difficult.
And so we've seen very few of these three sided marketplaces, as you describe, with Microsoft, but there you go. I mean, they've been around since 76, 78, and they're still worth $700,000,000,000. It's very, very durable once you get it, but hard to do. We're now seeing more of these incited, marketplaces where you could have, let's say, a event planner with a photographer with a a venue with Currier or Cater or at all.
And so they can all coordinate and collaborate, using the software in ways that they couldn't have done before. And we're seeing that go in the travel industry. We're seeing that in the consulting industries, etcetera, etcetera, because these are marketplaces where there's lots of independent workers and, you know, obviously Intuit and the software you have services, a lot of these SMBs.
And they are all in their own small networks, that are offline today, and we could, we could help bring them online. So we're seeing we're seeing that. The, the other challenge with these two sided marketplaces, again, gets back to the issue of liquidity. Where if I come and I list an object that I want to sell and it doesn't sell, then I might never come back. Or if, or if I come to find something and not there or it's not in the quantities of the prices that I want, then I won't come back.
Balancing that and then paying both sides, essentially, with your equity or with your time, to balance those out as you grow has proven really difficult. And so as a result, we've seen a lot of success with companies like OpenTable, or Salesforce who immediately put out a SaaS tool like you've done, right, to put out SaaS for a whole group of of users And then you build up the platform.
And then on top of the platform, you can stack, other applications, and that builds you a network effect that starts with a SAS company first. But again, it takes a mental shift to then move into this new network type of a business. Yeah. Let me pick on 2 of the themes you talked about because I think they're so right on. The first is you mentioned it's like running 2 companies at once. And I think that's quite true. I see companies when I coach CEOs and our internal startups.
They're often much more comfortable in looking at one side of the market, and they tend to forget the other. Because of personality, yeah, just they're more familiar with one side. So they're trying to solve the problem on one side by using the other side. But in fact, you have to solve some large problem for each side. Yeah. Problem will probably be different. You know, a, for PayPal, a buyer, wants to be able to buy the item. A seller wants to be able to collect money.
So there's but you have to solve each a big problem on each side. Otherwise, you won't get people in Morgan personal biases or your own affinities end up, you're Beller your Color balance. I find the teams will be so focused on one side and just make assumptions about the other side. No, you gotta understand what's their biggest problem, and how are you gonna solve it? Because if you don't solve it, they're not gonna come.
So I think that's on each side, there has to be a large problem that you can solve well by participation in the network. And then secondly, there's the thing that you mentioned about the chicken and egg problem that, all networks have a chicken and egg problem that has to be solved first. And if you can't start getting scale, you'll never get off the ground because these only work when you start getting volume.
Now there's I think the I've not seen good work written outside the company on the ways to crack the chicken and egg problem. But our strategy team here at Intuit did the best work I've seen, and there's 4 or 5 different ways that we've observed that people solve the chicken and egg problem. One is virality. You know, LinkedIn did this where members invited other members.
Another's incentives, PayPal did this where they paid, participants, $5 if they brought in a new participant and paid the new participant, $5. The, so those are a couple of methods that have been used. Another is the one you mentioned, which is build something of stand alone value that works down when you don't need the other side. Like Microsoft Word was a very good word processor. You didn't need other word users because you could use printing as the interface.
And, and that's what we do with QuickBooks OpenTable did that by first selling a software platform to restaurants for managing reservations and you didn't have to be part of their network for that to be a value. Yeah. We've actually got an article called 19 waves of solving the chicken. Right? Oh, we do. Which we've got best work we should we should send Yeah. We should send that to you. World's needing someone to talk about that. Yeah. We've got some good videos on it as well.
It's it's definitely a big challenge. The, the, the point you make about needing to, run 2 different businesses at the same time, you know, often these marketplaces, one side is more important than the other. So it's actually easier to get one side than the other. And in fact, the founder I've found needs to develop more affinity for the harder to get one. Because as soon as they get them, the other will typically show up.
There are cases where the one side will show up as soon as you get the the first side, and you've gotta figure out how to get the first side. Correct. And and we've seen a lot of failure in the marketplaces when they have an affinity for the weak side. Right. Yeah. And we'll actually we'll actually call them demand side marketplaces, meaning the demand is what important on this side, or we'll call them supply side marketplaces, meaning if you get the supply, the demand will come.
You know, a good example of that would be a company like outdoorsy where there's 35,000,000 people trying to rent an RV, but only 50,000 RVs to be rented in the United States. So if you can just get more supply on that marketplace, you are gonna end up with a lot of the demand just finding you because they're they're also looking for it. I think job boards are similar in a way. If you have the job job seekers will find you. That's right. That's right.
And so figuring that out and and getting people focused on that is is one of the challenges. Mhmm. And so who do you turn to for knowledge around network effects? Who do you and your teams turn to? I mean, Tom Isaman, has written some great things in Pete. Out of Harvard Business School, but not since, you know, 2004, 2007, are there other folks that you can remember reading that you thought were great? There are some academics who are reasonable.
Andrew Hagu, who's at BU and Marshall Von Alstein, also at BU have written Andre's got a book. But again, that's a decade old, I think. And so I think there's good material there. I think the stuff that you guys are producing may be the most current and, and most, inclusive, even beyond what I new. So I've that's, I think, where I'd send people first. We found that when the word network effects comes up, we first have to unpack viral effects Oh, yes.
Yes. Yes. Yes. And certainly viral effects, they're a completely different playbook. They can often be better used on top of things that have network effects simply because of the pallet of semantics, the palette of language you can use to develop features and, and, and pathways for people to get viral, but it really is a separate thing.
And then once you've just been able to identify the look, network effects are about defensibility and about value creation, in your product, then you can start to break it down into its multiple components. Yes. Beller said it's often conflated with something unrelated Yeah. Which is virality. Right. It's great if they happen together, but they don't have to. No. There are separate effects. That's right.
You could actually buy a network effect on a 2 set of marketplace if you, I've just spent a $1000 to get enough supply you know, times a thousand people, that might be enough to get you there. It doesn't have to be viral at all and that would create a network effect. Mhmm. So what advice Scott, would you give to founders as they're starting their companies, particularly around network effects and their impacts?
Well, one would be to figure out early on, is it really a candidate as an as a network effect or not. Because just a 2 sided business is not a network effect. And so there's another confusion. A business with two sides may or may not be. I mean, at a typical magazine, was a two sided business. You've got readers who read the editorial, and advertisers who pay for the advertising. So newspapers, magazines are 2 sided but they're not network effects.
No. There was a little bit of a transportation, scale advantage for newspapers at one time. But magazines never had that, which is why there are so many magazines. You know, it all Pete the strength and power and position that, nobody in the magazine industry achieve what modern network effects do. So just being two sided does not mean your network effect. I think a key to that is understanding multi homing.
Is there a natural incentive for the participant or the participants on each side to deal with only one platform? That's single homing. And then there's this much stronger case that you can build a network effect. On the other hand, if the participants on 1 or both sides can play the field, easily, then you're not gonna have that durable advantage. And you see some of this with Flint and Uber where it's very easy for drivers. In fact, drivers usually run both.
Mhmm. And travelers, passengers often have both. So it's, which is why you have 2 of them there losing money instead of one that's successful. Profitable, at least. Yeah. Multi homing sometimes they call multi tenanting as well. Yes. So I think that's an early thing to figure out to run the test. And will this really turn out to be a network effect or not. Mhmm. And to do that, you would have to read up on them. You'd have to think about it. You'd have to study them.
You'd have to see what has produced network effects in the past if you're a founder to try to get a better sense of whether you've really got 1 or not. You gotta find people who are knowledgeable about it. And then managing to crack the chicken egg thing. So reading your article on the 19 ways to crack the chicken egg problem. And when you think about these network effect businesses, I mean, eBay obviously is now, what, twenty four years old or something.
What are some of the exemplars you're seeing even more recently? I mean, clearly slack has got a great direct network effect. They've got some embedding network of you know, they've got some embedding defensibility where they've embedded as enterprise software into these companies. What are some of the companies you look at and say, yeah, boy, those guys are doing it right recently? Well, I I'm not sure I can tell you who's doing it great. Okay. I can tell you who seems to be delivering results.
So GitHub would be another. Yeah. Of course, the ones that are on people's lips would be, you know, Lyft and Uber and Airbnb. What other names come to mind among the more recent crop? Well, Instagram, the WhatsApp Yep. To be Morgan in in China, a number of, you know, 10¢. Yeah. Companies like Dropbox just went public. They've got a nice network effect there between all the sharing that that goes on, or you're looking at a posh mark, you'll probably go public next year Mhmm.
To the side of marketplace, maybe even a 3 side of marketplace Flint your choosing as they add stylists into their fashion Yes. Marketplace. You know I think is, rent the runway turning Flint, a network effect, or is that Doesn't feel like it to me. It feels like more of, sort of, ecommerce direct to consumer They've got a nice spin. They've got a nice pitch, but ultimately, they are the ones who are owning the the objects and then then renting them out.
Certainly, if you expand recent to include the last 12 years, you'd have the iOS and, Android operating systems with their associated, app stores. Absolutely. I mean, before, you know, Apple had a market cap of 40,000,000,000 then added iTunes and jumped to about 60, which iTunes had had a 2 sided network effect for a while there. And then they added iOS, and they Top the trillion.
I mean, it's as soon as they finally added network effects to their business, you know, they multiplied the value of the company by 10x. What are the impacts of these network effects on society? Because like you said, a few people can create so much value. A few people can be in control of so much communication between others. You know, many of these companies are based in the Bay Area, and then they're servicing the world from Pete.
Have you thought a little bit about what we might expect to see with society and what government needs to do, or the broader impacts of the fact that these things are are much easier to build than they were 30 years ago before the internet, and then the incredible power that they create once they are built. I think the longer view would be that there have been in history. This is not unique to our moment. Situations like this have existed for a 100, 150 years.
They're more common, more walks of life today. But the basic reality, you had the Bell Telephone Network, which is where the concept of network effect was named where, one company eventually built a communication network, which had all the characteristics of a modern network effect. You had great concentration of wealth in the oil industry, and in the railroads. Railroads were a community monopolizing because of the capital requirements, people didn't put tracks next to other tracks.
So you tended to have a high share in a form of communications. Direct. Direct. Physical. That was effects. The the the core, the most defensible. And these were generally built by very small teams. You know, you have the, the companies might be large, but the owners were concentrated in the original railroad barons. The oil barons, you know, like, Beller. You know, AT and T was for most of my life, the largest Morgan cap company in the world. So this phenomena has existed for quite a while.
And I think for tremendous societal benefit, I had a guys saying, well, you know, what's the thing you read that they they promised us flying cars, but they only gave us Facebook. Yeah. Or or a 140 characters. Yes. And that's one way to view it, but here's another way. So my family and I were vacationing 3 4 years ago in New Zealand. And we took a boat ride for a while, and we'd done a hike. And then we took the boat back.
And I roamed around and met some people on the boat, including 4 or 5 Brits who had relocated from the UK. To New Zealand about a decade Morgan. And I asked him also, how do you like life in New Zealand? And they described all the things they liked. So I didn't said, so what do you miss about the UK? And one said, oh, there was this pub we used to go to. We really love that pub. And another said, oh, there was a shopping street. We really love to go to the shopping street.
Somebody said something else that was physical. I said, well, you know, it's odd here. Is you've never mentioned any people that you miss any people. I said, well, of course, I pulled out their phone. It's no. They're right here. They're running. They're on I in fact, I see them more now than I did when I lived there. I see them every hour, practically, on Facebook Beller day when I wake up. No. I'm I I'm closer to my buds in communication and more frequently than I was when I lived in the UK.
Thanks to this thing called Facebook. And when you think about it, their predecessors who move from the UK to New Zealand say 50 years before, would most likely never ever see their friends and relatives in the UK ever again. They would never talk with them because long distance was so expensive. If they ever talked with them, it would be when somebody died and then for 3 minutes. They would write letters painfully by hand, and then they would take weeks to get there.
This they would never physically see them again. But now we have worldwide free video calling and this ongoing register through of life events through Instagram, through Facebook for free. For free. Oh my god. What a change this makes to maybe one of the most fundamental human desires the ability to stay close to those that you know and love. All facilitated by having these global networks. On a backbone of of free digital bits.
What now if we were divided into each country's network and they didn't work together or you had stuff like the way telecoms used to be regulated, it wouldn't be. But because these are kind of national Morgan, which can can take advantage of the power of free. And once you, you know, it's like science, when you get things to absolute 0, the rules of science change. The rules of physics change at and close to absolute 0.
Similarly in economics, the rules of economics are going out the window when you get to free. And you start getting unlimited supply of free things. So this, this, you know, thanks to Skype global worldwide free video calling. Instagram, Facebook, your Twitter, the ability to stay close, closer than even when you are in the same city. Without these technologies is is, a change to human. We take it for granted now.
Yeah. But if if you would go back 50 years and share what we take for granted and don't even think about to people who are living then, they would say the the world could never get that good. That's so far beyond any Beller, only a god could deliver the thing you just described. And then you look at the ability to, get a ride wherever you need it, the ability to find apartments. And for people who have the spare apartments to take advantage of those, to turn those into income.
That's allowing people to stay in their homes longer, giving people second incomes much, there's so much unused assets in the world, whether they're second bedrooms, whether they're vehicles, most vehicles sit idle 90 plus percent of the time. Beller it's RVs who said idle most of the time and enables enabling assets bought and paid for to turn into value for the user and for the owner. I mean, this is a miraculous world we get to live in. I think of Wikipedia.
Mhmm. You know, a a destitute girl in a slum in Bangladesh whose family has a phone and a data plan. Has more information at her fingertips for free than Bill Clinton had as president. Yeah. Now you give Bill Clinton's guys and gals, 2 days, they can get a lot of information. But at her fingertips, and for essentially only the cost of the data plan, which particularly like in India, now they have the lowest data plan cost in the world.
And that's just any random kid whose parents have a phone, smartphone. This is an unbelievable power. Thanks to vast contribution, a network effect around Wikipedia. Yeah. 700,000 people knew where to go, which is to Pete, and they knew where to put their time, and they knew it was going to be valuable other Pete, and therefore, it was valuable to them to spend those hours. Mhmm. Because they had confidence that that would be the one place that the information would aggregate.
And now the woman in Bangladesh can also know that that's where the information is aggregated. And that value to her, that value to the writers aggregates because we have this concentration. So, yes, people get worried that we have this concentration of power, this concentration of influence, we also have this, this flourishing of value. Yeah. Pete contributors aren't gonna contribute to some fractionated thing that nobody comes to.
Mhmm. They wanna contribute where the world can see and benefit from their contribution there. What this has produced is something I wrote about in an article I wrote, she 2008, this volunteerism where now millions of people volunteer to help others through these platforms. So the Wikipedia editors and authors don't get paid.
It's all work for free that they do for a sense of social standing, for a sense of contribution, for a sense of benefiting others, We have we run, help boards inside Intuit for our customers where customers can ask questions and other customers can answer them. Including in areas like tax and small business. And some of our customers will answer thousands of questions. From other of our customers. For free. For free.
We got some of our super users to come to one of our leadership meetings with our execs. And 3 of them on stage. All of them had answered over 10,000 questions. All three. One school teacher, she gets home. She has her School work and grading. And then into the night, she's answering tax questions. Another guy retired answers tax questions all day long. Tax questions. Some of them, they have to go research. They have to go into the IRS documents, and that's no fun to research to get the answers.
And finally, one of our execs asked, well, why do you do this? Is this the points, the scoreboard, the the medals, the badges, they looked at each other and said, yeah. We've we've seen those badges in the scoreboard, but no. This is this is how I help people. I know about this. I like being able to help people. I can now help thousands of people in a way I could never do just helping my neighbors because of the size of these platforms.
It's uncorked the degree of volunteerism, unprecedented in world history. Yeah. Really really giving people opportunity to feel meaning. Yes. And value in themselves. Right. Beller respect through these platforms as well. So all those benefits come to to counter some of the concerns that, people have politically about. Some of these really powerful concentrations. I agree with you. It's amazing. Mhmm. Both is true. What a world we get to live in? It's true.
All true, all driven by network effect businesses. Well, you compare back to 50 years ago. So what would that be 1968? One, a phone wired to the wall, one phone in the household, cars that broke all the time, at one TV, big hunkin box, three channels. You took what they gave you. If you stepped away, you lost it forever. Yes. Oh, well, a phone call long distance so expensive that, you know, practically someone had to die or get married before their vehicle.
Wow. Just that's just 50 years ago in the lives of us or our parents. How the world has changed? One encyclopedia now getting out of date every year sitting on, on the shelf, painfully slow. No links. So no way to link between your interested in something you couldn't follow because there weren't a links. Well, no YouTube if you want to learn something. I mean, no Khan Academy. So you had to, god, you've gotta sign up to school or something. You couldn't just learn on the Pete.
Well, now you got learning at your fingertips. 24 hours a day for free. Yeah. And we all know to go to YouTube. Right. And all the people who make that stuff know to put it on YouTube, because that's where we'll be. Yes. And again, if there was no YouTube, it wouldn't be there. There wouldn't be a place for it. So, yeah, what a world we get to live in? Scott, this has been great. Great to catch up with you. That's it. This is great. Good to see you. Thank you for your time. Absolutely.
We look forward to more conversations like this. I'll I'll keep learning from you.