There’s a classic story in economics primers illustrating the power of network effects. It tells how the first fax machine gave little value to its owner–after all, there was no one else with whom to send and receive faxes. As time went by, however, the value of that first machine increased as other people bought fax machines, and soon its owner could send faxes to the far corners of the earth, and receive them in return.
The point of the story is how the value of a node in a network rises exponentially as more nodes are added to it. These are called network effects.
Now let’s add a twist to the story. What would happen if, at the same time more fax machines joined the network, each machine rapidly improved its performance? The result would be an amplifying effect on the first level of exponential performance. One exponential effect occurs from growth in the number of nodes. A second amplifying effect arises from the improving performance of the machines themselves.