I love network effects; in fact, the world loves network effects. It's what drives the tremendous growth of websites like MySpace, Flickr, and of course, eBay
The network effect goes back to Robert Metcalfe, the founder of 3Com
Huh? Basically, a network becomes increasingly more valuable as more users are connected. For example, email is useless if there is only one person. But if a million people use it, the overall value surges.
When you apply this to marketplaces, the same magic occurs. More buyers attract more sellers and, in turn, more sellers attract more buyers. It's a virtuous cycle.
Moreover, the network effect establishes a barrier to entry. In other words, why would a user go to another network if the No. 1 network provides more opportunities? Another problem is that in moving to another network, the user has to learn a new approach, which is an added cost known as "vendor lock-in."
In fact, Google's
So, what are the investment opportunities? Interestingly enough, a variety of IPOs -- such as LoopNet
In the case of LoopNet, it has developed an extensive marketplace of buyers and sellers in the commercial real estate business. For the past year, revenues rose 56% to $48.4 million.
As for Liquidity Services, it's an online auction marketplace for wholesale, surplus, and salvage assets. In its fiscal first quarter, revenues were up 40% year over year to $45.2 million; net income was $2.3 million.
Essentially, these companies have low-cost models, as well as big market opportunities and growing brand recognition. This is the kind of stuff that any investor loves.
For further Foolishness:
- Liquidity Services Bids for Billions
- The Best E-Commerce Stock for 2007: LoopNet
- Life in the Fast Lane
What's sending Fools' hearts aflutter? Go back to our intro page to see what else we have a crush on.