network
maqi0912
NetworkEffects.pptChapter 17:
Network Effects
In addition to our Chapter 17, I refer to Chapter 6, Understanding Network Effects, in “Information Systems: A Manager’s Guide to Harness Technology” by Gallaugher.
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, Metcalfe’s Law)
When present, product or services become more valuable as its installed base expands.
Value
Number of Users
Quiz Question 1: How is Metcalfe’s 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
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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
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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 Facebook’s exponential growth in its early years.
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