This preview shows page 1. Sign up to view the full content.
Unformatted text preview: peting o n Analytics: The New Science o f Winning (Bo sto n: Harvard Business Scho o l P ress,
2007). Network Effects
Facebo o k is by f ar the mo st do minant so cial netwo rk wo rldwide. Micro so f t Windo ws has a 90
percent market share in o perating systems. EBay has an 80 percent share o f o nline auctio ns. Why
are these f irms so do minant? Largely due to the co ncept o f net work ef f ect s (see Chapter 6
"Understanding Netwo rk Ef f ects"). Netwo rk ef f ects (so metimes called netw o rk externalities o r
Metcalfe’s Law ) exist when a pro duct o r service beco mes mo re valuable as mo re peo ple use it. If
yo u’re the f irst perso n with a Facebo o k acco unt, then Facebo o k isn’t very valuable. But with each
additio nal user, there’s o ne mo re perso n to co mmunicate with. A f irm with a big netwo rk o f users
might also see value added by third parties. Apple’s iOS devices (the iP ho ne, iP o d to uch, and iP ad)
and Go o gle’s Andro id do minate rivals f ro m Micro so f t and HP in part because Apple and Go o gle
have tens o f tho usands mo re apps that run o n and enhance these devices, and mo st o f these apps are pro vided by f irms o ther than Apple and Go o gle. Third-party add-o n pro ducts, bo o ks,
magazines, o r even skilled labo r are all attracted to netwo rks o f the largest number o f users,
making do minant pro ducts even mo re valuable. Switching co sts also play a ro le in determining the strength o f netwo rk ef f ects. Tech user
investments o f ten go f ar beyo nd simply the co st o f acquiring a techno lo gy. Users spend time
learning a pro duct; they buy add-o ns, create f iles, and enter pref erences. Because no o ne wants to
be stranded with an abando ned pro duct and lo se this additio nal investment, users may cho o se a
technically inf erio r pro duct simply because the pro duct has a larger user base and is perceived as
having a greater chance o f being o f f ered in the f uture. The virtuo us cycle o f netwo rk ef f ectsA
virtuo us ado ptio n cycle o ccurs when netwo rk ef f ects exist that make a pro duct o r service mo re
attractive (increases benef its, reduces co sts) as the ado pter base gro ws. do esn’t apply to all tech
pro ducts, and it can be a particularly stro ng asset f o r f irms that can co ntro l and leverage a leading
standard (think Apple’s iP ho ne and iP ad with their clo sed systems versus the o nce-do minant but
no w rarely used Netscape bro wser, which was almo st entirely based o n o pen standards), but in
so me cases where netwo rk ef f ects are signif icant, they can create winners so do minant that f irms
with these advantages enjo y a near-mo no po ly ho ld o n a market. Distribution Channels
If no o ne sees yo ur pro duct, then it wo n’t even get co nsidered by co nsumers. So dist ribut ion
ch annels—the path thro ugh which pro ducts o r services get to custo mers—can be critical to a
f irm’s success. Again, techno lo gy o pens up o ppo rtunities f o r new ways to reach custo mers. Users can be recruited to create new distributio n channels f o r yo ur pro ducts and services (usually
f o r a cut o f the take). Yo u may have visited Web sites that pro mo te bo o ks so ld o n Amazo n.co m.
Web site o perato rs do this because Amazo n gives them a percentage o f all purchases that co me in
thro ugh these links. Amazo n no w has o ver 1 millio n o f these “asso ciates” (the term the f irm uses f o r
its af f iliat es), yet it o nly pays them if a pro mo tio n gains a sale. Go o gle similarly receives so me 30
percent o f its ad revenue no t f ro m search ads, but f ro m advertisements distributed within thirdparty sites ranging f ro m lo wly blo gs to the New Yo rk Times.Go o gle Fo urth Quarter 2008 Earnings
Summary, http:/ / investo r.go o gle.co m/ earnings.html. In recent years, Go o gle and Micro so f t have engaged in bidding wars, trying to lo ck up distributio n
deals that wo uld bundle so f tware to o ls, advertising, o r search capabilities with key partner o f f erings. Deals with partners such as Dell, No kia, and Verizo n Wireless have been valued at up to
$ 1 billio n each.N. Wingf ield, “Micro so f t Wins Key Search Deals,” Wall Street Jo urnal, January 8,
2009; P . Clarke, “Repo rt: Micro so f t to P ay No kia $ 1 Billio n f o r Suppo rt,” EETimes, March 8, 2011. The ability to distribute pro ducts by bundling them with existing o f f erings is a key Micro so f t
advantage. But beware—so metimes these distributio n channels can pro vide f irms with such an
edge that internatio nal regulato rs have stepped in to try to pro vide a mo re level playing f ield.
Micro so f t was f o rced by Euro pean regulato rs to unbundle the Windo ws Media P layer, f o r f ear that
it pro vided the f irm with to o great an advantage when co mpeting with the likes o f RealP layer and
Apple’s QuickTime (see Chapter 6 "Understanding Netwo rk Ef f ects"). What about Patents?
Intellectual pro perty pro tectio n can be granted in the f o...
View Full Document
This document was uploaded on 01/31/2014.
- Winter '14