Platforms, Networks Effects, and Competing in aWinner-Take All World

Management Info Systems - Chapter 9: Platforms, Networks Effects, and Competing in a Winner-Take All World Introduction ● Network effects: when the value of a product or service increases as its number of users expands ○ Also referred to as "network externalities" or "metcalfe's law" ○ Most products are not subject to network effects ○ Presence of network effects are among the most important reasons you'll pick one product or service over another ● Platforms: products and services that allow for the development and integration of software products and other complementary goods, effectively creating an ecosystem of value-added offerings Exchange ● The first source of network effects is exchange ○ A network becomes more valuable because its users can potentially communicate with more people ○ 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/computer programs Staying Power ● The second source of network effects is staying power ○ Networks with grater number of users suggest a stronger staying power: long viability of a product or service ○ 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 Complementary Benefits ● The third source of network effects is complementary benefits ○ Complementary benefits: products or services that add additional value to the primary product or service that makes up a network ■ Platforms: allow for the development and integration of software products and other complementary goods ■ Each add on of an IOS product enhances the value of choosing it over a rival ○ Value adding sources (exchange, staying power, and complementary benefits) often work together to reinforce one another to make the network effect even stronger Roblox - $30 billion Giant Featuring Some Pint Sized Platform Builders ● Roblox is a virtual world where you get an avatar ○ Allows users to create their own games and experiences and share with others ● By year end 2020, Roblox had over 150 million members ○ Averages over 32 million daily active users ● Creating involves learning to code so parents feel better about this screen time ● Develop something other Roblox users want and you can sell it in Roblox ● Roblox's marketing costs are very low ○ Virality of young fan base, and tendency of kids to recruit friends have helped Roblox grow ○ Customer acquisition costs (CAC) are rock bottom low ○ Revenue spent on marketing is around 6.2% lower than most of the major public tech firms How Are These Markets Different? ● One sided market: market that derives of its value from a single class of users ○ Example of this kind of network is messaging ○ Same side exchange benefits: benefits derived by interaction among members of a single class of participants ● Two sided market: network markets comprised of two distinct categories of participant. Both need to deliver value for the network to function ○ An example of this kind of network is video games ○ Cross-side exchange benefit: an increase in the number of users on one side of the market, creating a rise in the other side ● Network markets experience early, fierce competition ○ Caused by positive feedback loop inherent in network effects ● Firms are aggressive in the early stages - once a leader becomes clear, new adopters begin to favor the leading product over rivals ● Markets exhibit monopolistic tendencies where one firm dominates all rivals ○ Monopoly: market where there are many buyers but only one dominant seller ○ Oligopoly: market dominated by a small number of powerful sellers ● The best product or service doesn’t always win, due to the power of network effects ○ Playstation 2 (more users) dominated the original Xbox (superior machine) ○ Winning customers away from a dominant player in a network industry isn't as easy as offering a product or service that’s better ● Technological leapfrogging: competing by offering a new technology that is so superior to existing offerings that the value overcomes the total resistance that older technologies might enjoy via exchange, switching cost and complementary benefits Is This Good for Innovation? ● ● While network effects limit competition against the dominant standard, innovation within a standard may actually blossom ○ Programmers are willing to make the investment in learning to write software for Windows because a Windows version can be used by the majority of computer users By contract, look at the early mobile phone market: ○ With so many different carrier networks, hardware, and phone specs, writing a game that’s accessible by the majority of users was nearly impossible Strategies for Competing in Markets with Network Effects ● Move early (yahoo, auctions in japan, amazon v microsoft in cloud computing) ● Subsidize product adoption (paypal, zoom) ● Leverage viral promotion (skype, whatsapp, uber, airbnb, blue apron) ○ Social proof: the positive influence created when someone finds out that others are doing something ● Expand by redefining the market to bring in new categories of users (nintendo wii) or through convergence (iPhone) ○ Convergence: when two or more markets, once considered distinctly separate, begin to offer features and capabilities ○ Envelopment: when one market attempts to conquer a new market by making it a subset, component, or feature of its primary offering ● Form alliances and partnerships (NYCE v. Citibank, Didi/Ola/GrabTaxi/Lyft global ridesharing alliance v. Uber) ● Establish distribution channels (java with netscape; microsoft bundling media player with windows; apple embedding apple music in all macs and iOS devices) ● Seed the market with complements (blu-ray, ninendo, thredUP) ● Encourage the development of complementary goods - this can include offering resources, subsidies, reduced fees, market research, development kits, and training (oculus and amazon echo developer funds, apple swift playgrounds) ● Maintain backward compatibility (apples mac OS x Rosetta translation software for PowerPC to Intel, samsung pay using existing mag-stripe standards) ○ Backwards compatibility: the ability to take advantage of complementary products developed for a prior generation of technology ● For rivals, be compatible with larger networks (apples move to intel; samsung pay compatibility with magstripe credit card standards) ● For incumbents, constantly innovate to create a moving target and block rival efforts to access your network (apples efforts to block access to its own systems) ● For large firms with well known followers, make preannouncements (microsoft, apple) The Zoom Boom - Big Guys Can Be Beat ● As is true of many disruptive innovators, Eric Yuan: ○ Worked for the biggest player and helped build an early version of WebEx ○ Regularly met with customers who had many complaints and dissatisfaction ○ Brought ideas to Cisco for improvements but was rebuffed ○ Knew the product could be better and quit Cisco, taking forty engineers with him ● ● ● ● ● ● to found Zoom Zoom would focus on addressing complaints against WebEx ○ Easy to install across platforms, and equally easy to use ○ Call reliability would be improved ○ Any offering would be feature rich so customers could see zooms advantages ○ Pricing would be simple to understand Zoom did not have a burdensome initial account setup and many chose to signup because of this, fueling viral promotion of the software Freemium: a product with a free version - sometimes with limited features or that stops working after a period of time - to allow customers to try a product and hopefully entice them into making a product purchase or subscription decision Zoom appealed to many: ○ Professional corporate customers ○ Consumers looking to zoom with grandma ○ Those who wanted to set up playdates for their kids During the pandemic and global shutdown in 2020, zoom emerged as best in class: ○ Low cost ○ Clearly superior version ○ Early adoption from low tech school districts ○ Was given away for free to k-12 schools, fueling awareness and network effects ○ User base increased twenty fold in just four months ○ Rapid response of unforeseen issues - when security and privacy issues arose, Yuan halted new features for ninety days so all engineers could work on stamping out issues Rise of zoom provides a host of key lessons: ○ Others lost a market by failing to focus on customer needs, which created an initial opportunity for employees to leave their jobs to start a better company ○ Zoom ease of use positioned it with a very wide target market that spanned corporate and casual use ○ Pricing was cheap and straightforward ○ Firms commitment to rapid response was vital for dealing with unseen circumstances