Characteristics of markets and Network Effects

Network Effects
In addition to our Chapter 17, I refer to Chapter 6, , in Information Systems: A Managers Guide to Harness Technology by Gallaugher.

Available at: https://my.uopeople.edu/pluginfile.php/57436/mod_book/chapter/121629/BUS5114.Gallaugher.Information.Systems.A.Manager.Guide.to.Harness.Technology.pdf

Issues Covered

Network Effects
Defined
Characteristics of markets & competition when present
Examples
Difficulty of technological leap-frogging
Strategies for competing in network markets
Understanding Network Effects

(a.k.a. Network Externalities, Metcalfes Law)

When present, product or services become more valuable as its installed base expands.

Value

Number of Users

Quiz Question 1: How is Metcalfes interpretation of network effects wrong?

Sources of Network Effects

Incumbent product

— VALUE —

Quiz Question 2: Which of the following is not a source of network effects?

Switching Costs & Microsoft

It is this switching cost that has given our customers the patience to stick with Windows through all our mistakes, our buggy drivers, our high TCO [total cost of ownership], our lack of a sexy vision at times, and many other difficulties [] Customers constantly evaluate other desktop platforms, [but] it would be so much work to move over that they hope we just improve Windows rather than force them to move. [] In short, without this exclusive franchise [meaning Windows] we would have been dead a long time ago.

– comments from a Microsoft General Manager in a memo to

Bill Gates

One-Sided or Two-Sided Markets

*

members

One-sided markets

Networks that drive most of their value from a single class of users
Same-side exchange benefits (benefits derived by interaction among members of a single class of participant)
Two-sided markets

Networks markets comprised of two distinct categories of participant, both of which are needed to deliver value for the network to work.
Cross-side exchange benefits (When an increase in the number of users on one side of the market creates a rise in the other side)
buyers

sellers

Users (Windows, PS2)

Developers

(programs, game titles)

How are these markets different?

Early, fierce competition
Bandwagons Tipping point
Monopolistic tendencies
*

Quiz Question 3: Which of the following is not a characteristic of markets experiencing network effects?

Technological leapfrogging is difficult

Incumbent product

New, incompatible entrant

— VALUE —

Quiz Question 4: What does technology leapfrogging mean in the context of competing with the incumbent taking advantage of network effects?

Strategies for Competing in Network Markets

Move early
Subsidize product adoption
Leverage viral promotion
Redefine the market or leverage convergence
Alliances and partnerships
Distribution channels
Seed the market with complements
Encourage the development of complementary goods
Maintain backward compatibility
Rivals: be compatible with larger networks
Incumbents: constantly innovate to create a moving target
Large, well-known followers: preannouncements
D2L Discussion Question

Explain how network effects helped Facebooks exponential growth in its early years.