MIS ch 7 - network effects
Terms in this set (23)
The ability to take advantage of complementary products developed for a prior generation of technology.
gives installation advantage and lowers switching costs
blue ocean strategy
The idea—instead of competing in blood-red waters where the sharks of highly competitive firms vie for every available market scrap, firms should seek the blue waters of uncontested, new market spaces.
An approach where firms seek to create and compete in uncontested "blue ocean" market spaces, rather than competing in spaces and ways that have attracted many, similar rivals.
Products and/or services that add value to the base product
Partnering with complementary companies can boost product acceptance and enhance your network effects
EX: some games are only available for XBOX, not Wii
When two or more markets, once considered distinctly separate, begin to offer features and capabilities.
EX: markets for mobile phones and media players are converging.
When increasing numbers of users lower the value of a product or service.
This most often happens when a key resource becomes increasingly scarce or if a firm can't keep up with the growth
can happen with high end fashion - it's only valuable when only a few people have it
Network markets are often winner-take-all or winner-take-most, exhibiting monopolistic tendencies where one firm dominates all rivals.
While network effects create monopolies, governments may balk at allowing a firm to leverage its advantages in ways that are designed to deliberately keep rivals from the market
Also known as Metcalfe's (invented ethernet) Law, or network externalities. When the value of a product or service increases as its number of users expands.
user base is critical (Facebook, mobile phones) - VALUE=USERS^2
EX: The more people with an Xbox, the more people to play with
tipping point where network effects become so valuable that one winner emerges
can increase barriers to entry
a market dominated by a small number of powerful sellers
EX: "Big Four" record labels (Universal, Sony, EMI, and Warner) together provide over 85 percent of music sold in the United States.
derive most of their value from a single class of users
benefits derived by interaction among members of a single class of participant
EX: AIM chat users (IM users attract other IM users - everyone can send and receive messages to and from one another)
Network markets comprised of two distinct categories of participant, both of which that are needed to deliver value for the network to work (e.g., video game console owners and developers of video games).
EX: ebay (two users- buyers and sellers, if there were no sellers there would be no buyers and vice versa)
MORE of one class=MORE of the other class
Products and services that allow for the development and integration of software products and other complementary goods. Windows, the iPhone, the Wii, and the standards that allow users to create Facebook apps are all platforms.
Open - allow any company to use a technology. This helps drive penetration, growing the network of users
firms will spend their time and money to enhance your offerings (apple EX: iPod speaker brands, iPhone capable cars, app store -- apple is a closed platform that retains ownership and control?)
The long-term viability of a product or service.
Users don't want to buy a product or sign up for a service that's likely to go away
more than initial cost is invested in technology purchases (user invests in learning how to use a system, buying and installing software, entering preferences or other data, creating files—all of which mean that if a product isn't supported anymore, much of this investment is lost)
more users suggests stronger staying power
The cost a consumer incurs when moving from one product to another. It can involve actual money spent (e.g., buying a new product) as well as investments in time, any data loss, and so forth.
barrier to entry for new tech firms
higher the value of the user's overall investment=more staying power (the more a user has invested in a product, the less likely he or she is to leave)
"sticky" or creating "friction", "lock-in"
how well a company can create customers who are "barnacles" (that are tightly anchored to the firm, more friction) and not "butterflies" (that flutter away to rivals).
total cost of ownership (TCO)
all of the costs incurred before, during, and after a purchase
what products/services ARE and ARE NOT subject to network effects?
NASDAQ, ebay, Facebook, Visa, bluray, and social media sites are all affected by network effects.
Many services are not affected by network effects. (high end fashion, collector's items?, trash bags, light bulbs)
3 main sources of value for network effects
exchanging-- attracts more users
complementary products-- attracts more firms.
staying power-- enhanced by switching costs (anchor down partners who have already put in a lot of time developing software specific to your product) (also helps maintain users who bought your product)
factors that contribute to the staying power and complementary benefits of a product or service subject to network effects?
Staying power is influenced by switching costs and the total cost of ownership.
Complementary benefits are influenced by platforms and third party firms.
Overall, network effects are created by more hype, users, and relationships with other industries and firms.
difference between one sided and two sided markets
one-sided market derives its value from a single class of users
two-sided market derives value from two distinct categories of participant that are needed to deliver value for the network to work.
how does competition in markets where network effects are present differ from competition in traditional markets?
Markets with network effects experience early, fierce competition, exhibit monopolistic tendencies, and don't have the best products necessarily winning market share, depending more on technology and infrastructure, and technological leapfrogging is very tough making less rivals appear.
In traditional markets there are bandwagons and less competition and more variety.
why is it so difficult for late-moving, incompatible rivals to compete in markets where a dominant proprietary standard is present?
Any product that is incompatible with the dominant network has to exceed the value of the technical features of the leading player, plus (since the newcomer likely starts without any users or third-party product complements) the value of the incumbent's exchange, switching cost, and complementary product benefit
pretty hard to do
has to be so good it makes people want to pay the switching costs in order to switch products, specifically the complements, benefits, and user base associated with the standard. Innovation by itself will not work.
what are some strategies for competing in markets where network effects are present (both for the established and new players)
Examples of firms who have leveraged strategies to compete effectively?
1. move early - be first to the market to become dominant (EX: iPod was the first device of it's kind and everyone got it, no one wants to buy the Microsoft Zune player or any others now)
2. subsidize adoption - sometimes it is worth paying customers to adopt your technology and build the size of your network
-they offer an amount they think they can get back
- google offered $10 million in app developer incentives to boost it's android over the iPhone
- free use of Guilt Groupe app still encourages more sales
firm seeks to make an existing market a subset of its product offering.
(Apple deftly morphed the iPod into the iPhone, a device that captures all of these product categories in one device.)
Leverage viral promotion (Skype; Facebook feeds)
Expand by redefining the market to bring in new categories of users (Nintendo Wii) or through convergence (iPhone).
Form alliances and partnerships (NYCE vs. Citibank)
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—this can include offering resources, subsidies, reduced fees, market research, development kits, venture capital (Facebook fbFund).
Maintain backward compatibility (Apple's Mac OS X Rosetta translation software for PowerPC to Intel)
For rivals, be compatible with larger networks (Apple's move to Intel; Live Search Maps)
For incumbents, constantly innovate to create a moving target and block rival efforts to access your network (Apple's efforts to block access to its own systems)
For large firms with well-known followers, make preannouncements (Microsoft)
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