Notes to help read Microsoft Case

Notes to help read Microsoft Case - Notes to help read...

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1 Notes to help read Microsoft Case Network effect – IT products and services can create significant network effect. That is, as more users use the product, the value of using these products/services for users grows exponentially. Because of this effect it attracts more users into the network. This phenomenon is called MetCalfe’s law , which says V( n ) α n 2 . That is value V of n users is proportional to the square of n . Many real-life examples exhibit this phenomenon. AOL (America Online – a major Internet service provider) provided instant messaging, online chat, email and other services that attracted more users to the network (AOL was forced to make their IM available without becoming a member). Particularly high-school kids who belong to a network forced their parents to subscribe to AOL which then attracted parents and their friends, and so on. Yahoo! provides free Yahoo groups, email and instant messaging as well. Once groups form a network using Yahoo! it attracts other members to the group and it is difficult for any member to leave the group. Otherwise, a member incurs substantial switching costs to make everyone else in the group to move elsewhere. Even better, Yahoo! lets groups to use free storage space to some extent. Once the network becomes big and has accumulated a large amounts of data, the group will be somewhat forced to pay for additional storage space. The examples here reflect the network effect and how such effect can be used for strategic pricing. Network Externality is the term often used to describe the effect of one participant on the rest of the users in the network without being compensated (or penalized). This effect can be positive – as in most cases – or negative. Negative externalities can be observed in several examples. Assume everyone downloads a streaming video over the Internet in the MOD lab. As more users use the Internet at the same time everyone suffers. The download time will increase as more users get online. That is, an additional user coming
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Notes to help read Microsoft Case - Notes to help read...

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