Analyst Laura Martin has looked at the FAANG from all sides now.
From a deep (44-page) dive that landed on my desktop Thursday:
First, a definition:
At the simplest level, a Network Effect occurs when “each new user of a good or service adds value to some or all other users”. Academics often label Direct Network Effects “Network Externalities” or “Same-Side Network Effects”. Said another way, a Network Effects exist when the value of a product depends not only on its attributes but also on the number of consumers who purchase the same product…
- Not all Network Effects are equally strong. Each FAANG has some form of Network Effect, but some types are more powerful as moats/barriers to entry than others.
- Network Effects do not persist indefinitely. To remain an effective moat, Network Effects must be buttressed and supplemented over time.
- Internet markets tend to have winner-take-most outcomes, in part because the best programmers desert the sinking ship, which creates a negative feedback loop.
Then, the 13 types, ranked by strength:
Click to enlarge.
For those keeping count, here are the 13 flavors, in the order of decreasing strength:
- Personal utility
- Market network
- Marketplace (pro and con)
- Platform (pro and con)
- Asymptotic marketplace
- Tech performance
Finally, a chart comparing the FAANG by the elements of their business strategies:
Martin’s investment conclusion:
Based on the strength of its Network Effects, its strong culture of monetizing its Network Effects, and its strong Balance Sheet, we conclude that AAPL is best positioned to outperform FAANG competitors in a battle between these ecosystem giants.
My take: Does it bother you that the 14 criteria in the second chart don’t match the 13 in the first? It bothers me. Either way, Martin figures Apple is tops. A FAANG with fangs, she calls it.
There’s more to this report that I can fairly borrow. Readers who subscribe to Ben Thompson’s Stratechery will recognize many of these concepts. If you want to dig deeper, Needham offers pointers to work by the CEO of Bell Telephone (1908), Robert Metcalfe (1980), and Feng Zhu and Marco Iansiti in “Why Some Platforms Thrive… and Others Don’t.” (Harvard Business Review, Jan-Feb 2019).
See also: Needham issues ‘strong buy’ on Apple