Network Effects - Introduction to Information Technology...

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Introduction to Information Technology Management Session 7: Network Effect, Facebook Instructor: Dr. Raj 09/17/2015
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Learning Objectives Make a commitment to learn and share knowledge (and make a good grade as a result) Define network effects. 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 companies benefit from network effects Recognize and distinguish between one-sided and two-sided markets. Understand how competition in markets where network effects are present differ from competition in traditional markets. 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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Network effects 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. THE VALUE OF A PRODUCT OR SERVICE INCREASES AS ITS NUMBER OF USERS EXPANDS
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Network Effects Network effects are sometimes referred to as “Metcalfe’s Law” or “network externalities.” Facebook, Google, eBay, Instagram, Twitter, Skype, and YouTube have built massive user bases by leveraging network effects. When network effects are present, the value of a product or service increases as the number of users grows. However, most products aren’t subject to network effects. When network effects are present they’re among the most important reasons people will pick one product or service over another.
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The origins of value 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.
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The origins of value: Exchange A network becomes more valuable when its users can potentially communicate with more people. Exchange creates value and 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, and just about any standard that allows things to plug into one another, interconnect, or otherwise communicate.
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The origins of value: Staying Power Users don’t want to buy a product or sign up for a service that’s
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This note was uploaded on 10/16/2015 for the course MIS 301 taught by Professor Mccleod during the Fall '08 term at University of Texas.

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Network Effects - Introduction to Information Technology...

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