Network Effects in Communications

Communications industries are the classical illustration of the power of network effects. The more users a communications network has, the more value it offers to every user. The early days of telephony show how network effects were central in the definition of the strategy of the first players in the industry. Telephony was monopolized to fully exploit network effects, as all telephone users in a country would be able to interact in the same network. Regulation certainly played a role. Understanding the centrality of network effects and regulation in the strategy of founders, managers, and investors that grew a small startup to become the telephone monopoly in the US should help explain the current evolution of digital platforms.

History also shows how communications networks were the first industry to be disrupted by digitalization. Telephone networks were the first infrastructure to be digitalized. The transistor, the building block of digitalization, was actually invented in the Bell Lab in 1947 and deployed for the most efficient transmission and switching of telephone calls. However, digitalization would eventually trigger the end of the telecommunications monopoly. Transistors empowered computers, as well as the demand for communications services to connect computers. Networks that were in a position to connect not only humans with other humans, but also humans to computers and computers between themselves, would produce much larger network effects than the traditional telephone networks. Regulators concluded that the telephone monopolist was not in a position to meet the challenge of connecting the computerized world.

The internet - the distributed network of networks conceived and financed by the Pentagon - would prompt the largest network effects in the human history. The internet has transformed the communications industry, all other network industries, and beyond. Let us take a closer look at how it all started, a century ago.

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