MD240 -Management Information Systems
Oct. 25, 2005Network Externalities:
The Kingmaker of Tech Industry Competition
Topics Covered
• Network Externalities– Defined, Strategic Importance, Examples
• Operating Systems & Hardware Markets– Competition Among Operating Systems and
Computing Platforms– The Linux Challenge– Dell vs. the World– The Video Game Industry: Xbox Reloaded &
strategies for competing with new platforms
Network Externalities(a.k.a. Network Effects, Metcalfe’s Law)
• A product or service becomes more valuable as its installed base expands• Why do consumers care about installed base?
– Exchange opportunities– Stability– Extrinsic, complementary benefits
More Exchange Opportunities
More Members
Why are Markets for Network Goods Different?
• Market competition occurs very early and is particularly fierce
• Markets are ‘tippy’ and subject to bandwagons
• Markets exhibit monopolistic tendencies
• The ‘best’ technology or highest quality product doesn’t always win
SoftwareOperating Systems
control hardware and provide an environment in which applications execute
Application Programsend-user program that performs a specific function
Individual examples: word processor, spreadsheet. Collections of apps: Office (suite), SAP R/3 (ERP)
Appletssmall application programs which execute within a
larger environment (e.g. Java applets within browser)
operating system
applications
Competition in the OS Space
PersonalComputersWindows XP
Apple
Mutli-UserSystemsWindows 2000Windows Server2003
Unix (Sun, IBM, HP / Compaq)Linux
ConsumerDevicesWindows MobileUltimate TVXboxTablet PCWindows XP Media Center Edition
Palm (handheld)Liberate (set top)SonyLinux
Microsoft
Competition
A Growth Stock No More?
The Microsoft Stimulus Package
• In ’04 Microsoft returned $9 billion to individual investors that hold the stock (excluding all the institutions & funds).
• The Bush child tax credit returned $14 billion.
• Bill Gates has pledged all $3.4 billion to his charitable foundation.
Comments from Windows Source Code
private\genx\shell\inc\prsht.w:// we are such morons. Wiz97 underwent a redesign between IE4 and IE5
private\shell\ext\ftp\ftpdrop.cpp:// We have to do this only because Exchange is a moron.
private\shell\shdoc401\unicpp\desktop.cpp: // We are morons. We changed the IDeskTray interface between IE4
private\shell\browseui\itbar.cpp:// should be fixed in the apps themselves. Morons! .
Fear the Penguin?
Server MarketDesktop Market
16 Bit Game ConsolesSource: Schilling 2003
32/64 Bit Game Consoles (failed)Source: Schilling 2003
32/64 Bit Game ConsolesSource: Schilling 2003
128 Bit Game ConsolesSource: Schilling 2003
Components of Consumer Value for Network Goods
TechnologicalFunctionality
Installed base(exchange)
ComplementaryGoods Availability(extrinsic benefits)
Panel AIncumbent product
Switching Costs(stability)
Panel BNew entrant, compatiblewith existing installed baseand complementary goods
Switching Costs (stability)
TechnologicalFunctionality
Installed base(exchange)
ComplementaryGoods Availability(extrinsic benefits)
Compatible technologiescan tap into the same installed base and complementary products as the incumbent.This dramatically lowers (or eliminates) switching costs, leaving the products to compete on technical functionality.
Components of Consumer Value for Network Goods
TechnologicalFunctionality
Installed base(exchange)
ComplementaryGoods Availability(extrinsic benefits)
Switching Costs(stability)
Panel AIncumbent product
Panel CNew, incompatible entrant
TechnologicalFunctionality
Radical innovation may be necessary if an incompatible technology is to overthrow an established standard.
The technical benefits of the new innovation must exceed the exchange, extrinsic, and stability benefits of the incumbent.
Competing in a Standards BattleTactics for New Entrants• Complementary Products
– Develop own complementary goods
– Develop through third-parties (subsidize, exclusives)
• Attract Consumers– lower price, subsidize adopters,
money back guarantee, free trial
• Distributors– Subsidies / guarantees
(consoles on consignment)– Alliances (Sun & Netscape to
distribute Java)
Tactics for Incumbents• Continuous innovation within the
standard– Create a moving target
• Backward compatibility– Problem with Intel Itanium
• Create Switching Costs– Exclusive products– iTunes– AIM
Signaling can be used by both: Pre-announcements, credible commitments (Xbox=$500 million marketing budget, 3DO = $37 million)