Hidden network effects

Some businesses have defensibility through hidden network effects. You wouldn’t think it if you looked at the business from a theoretical perspective, but some weird quirks can endow companies with extremely strong network effects

My favorite example is the network effects for the big four elevator companies.

How on earth can an elevator company benefit from network effects? From the outside, it looks like you install an elevator once.

Elevators don’t interact with one another, so where is the network effect?

Maintenance and repair

The elevator companies already benefit from their brand as building owners want elevators that are extremely reliable and low maintenance.

But we all know nothing is perfect, so it’s important to be able to sell building owners on your network of repairmen.

Network effects emerge as you need many elevators (most of which have no issue in a year) to support the annual salary of an elevator repairman and repairmen tend to specialize in one brand.

So as there are more elevators of a certain type in a region, a repairman can charge less per repair job because there is more business available. If he were to travel overnight to a job (which does happen), those costs get added to the bill.

And beyond that, the network of repairmen gets bigger the more elevators there are of a brand in a region. That means faster schedule times and a faster resolution to problems.

So the utility received by the N+1 customer buying a certain brand’s elevator is higher than the Nth customer as (arguably) the costs & time to repair go down. (This ignores any price increase due to monopoly pricing)

Why did I write this thread?

Because there are many hidden or non-obvious network effects and demand-side economies of scale in crypto.

They’re harder to find, but they’re likely to be big winners over a longer period of time.