Forum #3
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Slides_ISDS705_Ch6Accessible1.pptxInformation Systems: A Manager’s Guide to Harnessing Technology
By John Gallaugher
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CHAPTER 6
Understanding Network Effects: Strategies for Competing in a Platform-Centric, Winner-Take-All World
LEARNING OBJECTIVE I
Define network effects.
Recognize products and services that are subject to network effects.
Understand the factors that add value to products and services that are subject to network effects.
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NETWORK EFFECTS
the value of a product or service increases as its number of users expands
Also referred to as network externalities or Metcalfe’s Law.
Most products are not subject to network effects.
Presence of network effects influences the choice of one product or service over another.
LEARNING OBJECTIVE II
Identify the three primary sources of value for network effects.
Recognize factors that contribute to the staying power and complementary benefits of a product or service subject to network effects.
Understand how firms like Microsoft and Apple each benefit from strong network effects.
SOURCES OF NETWORK EFFECT I
A network becomes more valuable because its users can potentially communicate with more people, thus, the importance of exchange in creating value.
Every product or service subject to network effects fosters some kind of exchange.
For firms leveraging technology, this might include anything you can represent in the ones and zeros of digital storage, such as messaging, movies, music, money, video games, and computer programs.
SOURCES OF NETWORK EFFECT II
Products and services subject to network effects foster exchange, which creates value.
Staying power: Long-term viability of a product or service.
Bolstered by networks with greater numbers of users.
Switching costs: incurred when moving from one product to another.
Directly related to staying power.
Strengthen the value of network effects as a strategic asset.
Increases with the higher friction available to prevent users from migrating to a rival.
Total cost of ownership (TCO): Economic measure of the full cost of owning a product.
SOURCES OF NETWORK EFFECT III
Complementary benefits: Products or services that add additional value to the primary product or service that makes up a network.
Platforms: Allow for the development and integration of software products and other complementary goods.
Value-adding sources work together to reinforce one another to make the network effect even stronger.
Each add-on of an iOS product enhances the value of choosing it over a rival.
LEARNING OBJECTIVE III
Recognize and distinguish between one-sided and two-sided markets.
Understand same-side and cross-side exchange benefits.
UNDERSTANDING NETWORK STRUCTURES
| ONE-SIDED MARKET | TWO-SIDED MARKET |
| Market that derives most of its value from a single class of users. Same-side exchange benefits: Benefits derived by interaction among members of a single class of participants. | Network markets comprised of two distinct categories of participant. Both need to deliver value for the network to function. Cross-side exchange benefit: An increase in the number of users on one side of the market, creating a rise in the other side. |
Table showing differences between one-sided market and two sided market.
One-sided market: Market that derives most of its value from a single class of users.
Same-side exchange benefits: Benefits derived by interaction among members of a single class of participants.
Two-sided market: Network markets comprised of two distinct categories of participant. Both need to deliver value for the network to function.
Cross-side exchange benefit: An increase in the number of users on one side of the market, creating a rise in the other side.
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LEARNING OBJECTIVE IV
Understand how competition in markets where network effects are present differ from competition in traditional markets.
Understand the reasons why it is so difficult for late-moving, incompatible rivals to compete in markets where a dominant, proprietary standard is present.
HOW ARE THESE MARKETS DIFFERENT? I
Network markets experience early, fierce competition.
Caused by positive-feedback loop inherent in network effects.
Firms are aggressive in the early stages because once a leader becomes clear, new adopters begin to favor the leading product over rivals.
Tips the market in favor of one dominant firm or standard.
Markets exhibit monopolistic tendencies.
One firm dominates all rivals.
Monopoly: Market where there are many buyers but only one dominant seller.
Oligopoly: Market dominated by a small number of powerful sellers.
HOW ARE THESE MARKETS DIFFERENT? II
The graph shows four vales for the incumbent product: Staying power (switching cost), Complementary products, Exchange with a product’s user base, Technological functionality. The graph shows one value for New, incompatible entrant: Technological functionality.
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LEARNING OBJECTIVE
Plot strategies for competing in markets where network effects are present, both from the perspective of the incumbent firm and the new market entrant.
Give examples of how firms have leveraged these strategies to compete effectively.
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COMPETING WHEN NETWORK EFFECTS MATTER I
Move early (Yahoo! Auctions in Japan).
Subsidize product adoption (PayPal).
Leverage viral promotion (Skype, Facebook feeds, Uber).
Expand by redefining the market to bring in new categories of users or through convergence (iPhone).
Convergence: When two or more markets, once considered distinctly separate, begin to offer similar features and capabilities.
Envelopment: When one market attempts to conquer a new market by making it a subset, component, or feature of its primary offering.
Form alliances and partnerships (NYCE vs. Citibank)
COMPETING WHEN NETWORK EFFECTS MATTER II
Establish distribution channels (Java with Netscape, Microsoft bundling Media Player with Windows)
Seed the market with complements (Blu-ray, Nintendo)
Encourage the development of complementary goods (Facebook fbFund)
Maintain backward compatibility (Apple’s Mac OS X Rosetta translation software for PowerPC to Intel)
Backward compatibility: Ability to use complementary products developed for a prior generation of technology.
Adaptor: Product that allows a firm to use the complementary products, data, or user base of another product or service.
COMPETING WHEN NETWORK EFFECTS MATTER III
Rivals: maintain compatibility with larger networks (Apple’s move to Intel)
Incumbents: close off rival access and constantly innovate (Apple’s efforts to block access to its own systems)
Large, established firms: make preannouncements (Apple Watch)
The Osborne Effect: Firm experiencing a sharp and detrimental drop in the sales of current offerings due to its preannouncement of forthcoming products
Congestion effects: Increasing numbers of users to lower the value of a product or service
