How do network effects create moats in platform businesses?

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AcadiFi · Accepted Answer

Network effects make a platform more valuable as additional users join, creating self-reinforcing advantage. Four types relevant to Tessera: (1) Direct — more users of the same type make the platform more useful; (2) Indirect (cross-side) — more buyers attract more sellers, and vice versa; (3) Data — more transactions improve recommendations; (4) Local — effects cluster geographically. Tessera is primarily a cross-side network — designers join because more ceramicists means better selection, and ceramicists join because more designers means more orders. ```mermaid flowchart LR D[More Designers] -->|Attract| C[More Ceramicists] C -->|Attract| D D --> T[More Transactions] T --> R[Better Data
Recommendations] R --> D ``` Quantification: measure the take rate stability as GMV scales. If Tessera maintains a 14% take rate while monthly GMV grows 40x without discounting, pricing power is intact. Compute cohort retention — of ceramicists who listed in Q1 2024, what percentage are still active 18 months later? Strong networks show 75%+ retention. Also track liquidity — median time-to-first-sale for new listings. Tessera dropping from 9 days to 2.3 days signals thickening liquidity. Valuation impact: network-effect businesses compound; model revenue as GMV * take rate, with GMV following a power law as the network densifies. Winner-take-most dynamics mean a 60% share leader earns 4-5x the profitability of a 20% share follower. Risks include multi-homing (if designers use 5 platforms, network effect is weak) and platform envelopment (Instagram adding shopping features could siphon off Tessera's top sellers).

How do network effects create moats in platform businesses?

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