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Reed Hastings: Scale Gets You Started. Network Effects Keep You Alive.

By Reed Hastings · Strategy · 1 min read

A company can get started two or three years before us in Germany. We can knock them out in 12 months because we have great scale. But it's not a network effect. When eBay tried to knock out Yahoo Japan — they didn't succeed. And that's been permanent.

Key Points

Netflix has great scale — can knock out a 3-year-old competitor in 12 months
But scale is not a network effect — network effects are permanent barriers
The test: how much pricing power do you have?

If you're in a network effect business, first is forever because the barriers are really strong. If you're just in a scale business — it's not as strong a barrier.

Scale: We Can Knock Them Out in 12 Months

Hastings: A company can get started two or three years before us in Germany and we can knock them out in 12 months because we have great scale. But it's not a network effect.

If you're in a network effect business, then first is forever — because the barriers are really strong. But if you're just in a scale business — Amazon, how quickly did they wipe out CDNow? Like 1999, really quickly. It didn't matter that CDNow had started earlier.

We can knock them out in 12 months. That's scale. But it's not a network effect.

Network Effects: First Is Forever

Hastings: When eBay tried to knock out Yahoo Japan, they didn't succeed. And that's been permanent. If you're in a network effect business, first is forever because the barriers are really strong.

There are scale economies — they're just not as strong as a barrier. So you can think of a barrier as how much pricing power do you have. If you've got a ton of pricing power, you can raise prices a lot and it's still very hard to come after you.

eBay tried to knock out Yahoo Japan. Failed. Permanently. Network effect barriers are that strong.