We've talked about economies of scale that's an aspect of size,
it's not the only way to use size are being big to leverage your position.
But it's an important source of competitor advantage.
For many manufacturing firms, this is a big source of advantages,
being bigger gives you lower cost.
So if you're an automotive company, scale is important.
If you're an airline, being large gives you advantages, gives you cost advantage.
Scale of operation can make you more efficient and can lower your unit cost.
As your scale goes up, your cost per unit may go down,
that's a big source of advantage for many large firms.
In addition to size mattering in scale, economies of scale.
There's also the economies of networks or
what economists might call a network externality or network effect.
In the information business, this was described as Metcalfe's Law.
And Metcalfe observed that many products or services
follow an interesting characteristic that the value of the product or
service is based on the number of interconnections between users.
And the number of the interconnections, the number of people you know,
who you could connect with, increases the square of the number of users.
So if you know one person with a fax machine,
there's two users, you've got one connection.
If you know two people with a fax machine, you could fax to both of those,
that's double now.
If you know a 100 people with a fax machine, and they know you, then 100
times 100 is 100, I mean if you know 10 people then you got 100 interconnections.
So the idea is as the square of the user base grows,
the value of the service grows.
And this is why Facebook is so hard to dislodge,
because it's worth a lot, because it's common.
Twitter is worth a lot because people use it.
WeChat and WhatsApp are valuable because people use them.
Airbnb is valuable because people use them.
If you start a small one, you face this network effect,
that you may be a better service, but you're not the standard.
And you're not what most people want to use,
because most people want to go to Airbnb because other people are on Airbnb.