Homing costs

Single homing

Multi hominh costs- upfront,

If you are a dominant player you would prefer to increase homing costs vs new player wants to
decrease.

Risks

Case: google

Cloudtail: Amazon and Narayan Murthy

Strategies : Subsidisation – Subsidise the purchase for the parties

But which party should be subsidized first?

Let’s say 4 subsidisations available: first give subsidy for early adopters assuming it is transitory,
second is the permanent subsidy where one side of the market continuously subsidises the other
side example google searches, third is exclusive arrangement with marquee users/content providers
and fourth you yourself become the supplier on platform.

(story of Netflix- before that blockbuster model, that rents DVDs and it is atricky business coz of the
limited window to make money not like long tail it’s a decentralized model also you don’t know in
advance which movies work, also lead time makes it impossible to order after release

Now inventory= rate * time,

To reduce inventory they reduced flow time

Now Netflix comes and reduces inventory as riskiness reduces as everything is kept in one portfolio.
Ultimately cost of ops is lower, centralized systems created to reduce inventory

4 costs matter in designing a supply chain: inventory, transportation, information, facilities.

Transportation cost up in Netflix (inventory is less; inventory cost is always expressed as a
percentage of product cost) but due to centralized systems, the increase in transportation cost is
more than offset by decrease in inventory cost as movies are an experiential thing

Coming back to chicken egg problem- either through subsidixation or through staging

Staging is when you first don’t create a platform, you just create a product. Once you have a user
base then you create a platform

Why is Microsoft’s subsidy behavior different in XboX vs Windows: Market position different,
consumer needs, value proposition, strength of competitors, major reason- RazorBlade model as
Microsoft gave consoles for free

Therefore which side should be subsidized- wherever propensity to change behavior with prices is
high

As windows it is about utility, gaming is discretion and with subsidy my behavior will change
therefore I will subsidise gaming. Although the subsidies should be temporary and then homing cost
should be increased nce high user base
Making sense of exclusivity: post lauch; if the product is dead, exclusivity doesn’t matter (no one will
want to be exclusive with you) vs if you are a hit, the incremental utility of being exclusive is low.

Therefore exclusivity makes sense pre launch for 2 reasons

-Signals quality

-Reduces stranding risk

Post launch exclusivity can only help you in one way- increase homing costs. But is it worth it?

Now coming to Google: WINNER TAKES IT ALL? Has 3 factors

- Network effects are positive and strong: cross side networks are high as advertisers will
come for more users. For users to advertisers also is high as ads are what provide permanent
subsidy. Therefore strong positive cross network effects
- Multi- homing costs: yes, high.
- Demand for differentiated products is limited- Yes