When the Internet was still a toy a decade or so ago, many business leaders and strategists didn’t believe that it would be possible to create a profitable business online.
The reasons given to support this belief were many and various.
Some argued that business on the Internet would never work because it is impossible to establish trust online. However, businesses like eBay, Amazon, Paypal, and LinkedIn have all proven this argument wrong.
Others argued more persuasively that business on the Internet would never work because, since anyone can have a website, the large number of websites would lead to a kind of hyper-competition resulting in the destruction of profits online; a boon for consumers but not so great for Internet-based businesses.
As it happens, this second argument also turned out to be wrong. But why?
If everyone can have a website why is it possible for some Internet-based businesses to compete successfully?
The answer is an ancient one, and appears to have been discovered in the early days of civilisation by the priests and then later by the universities.
In short, it is possible to establish a monopoly online with the help of three simple concepts: brand, scale, and network effects.
Brand is your level of social recognition, or share of mind. Since websites are typically free (in whole or in part) they are uniquely well suited for brand building.
Scale is how many people you can reach, and since websites can be accessed anywhere in the world, instantly and free of charge, the Internet is the most effective tool ever devised for reaching people at scale.
Network effects is when you bring people together around a common interest or shared purpose. Amazon and eBay connect buyers and sellers, Facebook connects friends, LinkedIn connects colleagues, and so on. The Internet enables online businesses to build monopolies by connecting enough people in a particular market segment to establish strong network effects.
Brand, scale, and network effects are three powerful barriers to entry that every Internet-based business needs to be aware of, and which can be used to build monopolies online.