One more question about leverage. Do you think a choice of business model or a choice of product can also bring a kind of Leverage to it? For example pursuing a business that has Network effects pursuing a business that has Brand effects or other choices of business model that people could manipulate that just give you free leverage.
Yeah, there's some really good micro economic Concepts that are important to understand one of those is scale economies, which is the more you produce a something the cheaper it gets to make that that's something that a lot of businesses have basic economics 101 and you should try and get into a business. We're making widget number 12 is cheaper than making widget number 5 and making widget number ten thousand is a lot cheaper than the previous ones and this builds up an automatic sort of barrier to entry against competition and getting commoditized. So that's an important one. Another one. This is along the same lines, but technology products, especially and media products have this great quality where they have zero marginal cost of reproduction.
So creating another copy what you just created is free. So when somebody listens to this podcast or watching a YouTube video about this, it doesn't cost me anything the next person who shows up those zero marginal cost things they take a while to get going because you make very little money per user but over time they can really really add up. So Joe Rogan is working no harder on this current podcast and he wasn't podcast number one, but on podcast number Eleven Hundred he's making a million dollars for the podcast. Where's for the previous one? He probably lost money. But the first one that's example of zero marginal cost and then the most subtle but the most important is this idea of network effects and it comes from computer networking Bob Metcalfe who created ethernet famously coined metcalfe's law, which is the value of a network is proportional to the square of the number of nodes in the network. So if a network of size-10 would have a value of a hundred network of a size hundred would have a value of ten thousand. It's not just 10x more. It's a hundred X more because the squares the difference is the
So you want to be in a network effects business assuming you're not number two, if you're number one and network effect business you win everything so example, if you look at Facebook, right your friends and family social networking protocol who's their competitor nobody because they want everything through Network effects, which is why when people say well I can just switch away from Facebook. They don't realize that Network effects create natural monopolies. They're very very powerful things. And one of the dirty secrets of Silicon Valley is that a lot of the winning businesses are natural monopolies, even ride-sharing tends towards one winner take all system. Like uber will always have better economics and lift as long as it's moving more drivers more writers around something like Google. There's basically only one Bible search engine. I do like DuckDuckGo, you know, privacy reasons, but they're just always going to be behind because of network effects Twitter right where else would you go for microblogging even YouTube has weak Network effects, but they're still powerful enough. There's really no number two site that you go to to consume your video in a regular basis it even turns out
Detail Amazon Prime and convenience store credit cards and information creates a powerful Network effect. So what is a network effect? This is Define it precisely a network effect is when each additional user adds value to the existing user base. So your users themselves are creating some value for the existing users the classic example that I think everybody can understand is language. Let's say that there's a hundred people live in the community and speak 10 different languages and each person just speaks one of those ten. Well, you're having to translate all the time. It's incredibly painful. But if all hundred of you spoke the same language, it would add tremendous value. And so the way that Community will play out is 10 people start out speaking 10 languages. Let's say that one extra person limbs English. Well now all of a sudden 11 people know English. So the next person comes in to learn new languages probably going to choose English at some point. Let's say English gets a 20 or 25 people it's done. It's just going to own the entire language Marketplace and the rest of the language will get competed out.
Which is why it long-term. The entire world is probably going to end up speaking English and Chinese China is closed off on the internet, but the internet itself is a great leveler and people who want to communicate on the internet are forced to speak English because the largest community of people on the internet speaks English. I always feel bad for my colleagues who grew up speaking foreign language and foreign countries because you don't have access to so many books. So many books just haven't been translated into other languages. So if you only spoke French or you only spoke German or you only spoke Hindi for example, you would be at a severe disadvantage in a technical education invariably if you go and get a technical education, you have to learn English just because you have to read these books that have this data that has not been translated. So languages are probably the oldest example of network effect money is another example, we should all probably be using the same money except for the fact that Geographic and Regulatory boundaries have created these artificial islands of money, but even then the world tends to use a single currency as the reserve currency at most times.
Currently the US dollar. So Network effects are very powerful concept when you're picking a business model. It's really good idea to pick a model where you can benefit from Network effects low marginal costs and scale economies and these tend to go together like anything that has zero marginal cost of production obviously has scale economies and things that have zero marginal cost of reproductions very often tend to have Network effects because it doesn't cost you anything more to Stamp Out the thing so then you can just create little hooks for users to add value to each other. So you should always be thinking about how your users your customers can add value to each other because that is the ultimate form of Leverage your the beach of the Bahamas or you're sleeping at night and your customers are adding value to each other.
