Network Effects: Strength

• Strength as a function of size:

• Metcalfe's law: the value of a network is proportional to the square of the number of devices in it
• Inspired by Robert Metcalfe, designer of Ethernet protocol
• Based on properties of Mesh Network= each node may be linked to N-1 others
• Thus, total no. of possible one-way links = N * (N-1) ≈ N^2, as N approaches large:

• WTP tends to increase as “S”-shaped (logistic) function of network growth

• More reasonable ‘coz:
• Budgetary and attention constraints hamper the growth rate of WTP
• Late adopters are not as valuable to others (the users) as early adopters

• Strength as a function of:

• Novelty from repeated transactions (DVDs)

• Users mobility require geographic coverage (ATMs, Wi-Fi, refueling)

• Idiosyncratic needs and offers (home buying, executive recruiting)

 Network Effects: Strength
• Network effects are demand-side economies of scale, i.e., they impact revenues
• Through user adoption and WTP
• are not supply-side scale economies
• Emanate from economies of scale or learning effect

• May be positive (large base is appealing) or negative (large base is non appealing)
 One sided platforms,
MSPs, and resellers
• Apple’s App Store is a MSP: consumers
purchase contracts are with app developers,
who control pricing and design of their products

• Apple’s iTunes is a reseller: consumers buy/ rent

music and movies from Apple, which has full
control over pricing and bears full responsibility
of the product sold

• Amazon web services sold to web developers One-sided

who build their web products and services on platform
top of AWS

• Electronic ink technology supplied by E-Ink is a • Intel CPU is ? • Apple’s iOS is ?

key component (platform) on which Amazon • MS Windows is ? • MS Xbox is ?
Kindle and Sony Reader devices are built
• IBM Watson is ? • Sony’ PS is ?
• Google Android ?
 Platform Roles: Sponsors and Providers
• Providers
• mediate users’ interactions
• users’ primary point of contact with
platform
• Sole provider: XBOX,
• Multiple provider: DVD forum
• Sponsors
• do not deal directly with users;
• hold property rights that determine:
• Who may change platform tech ?? Provider:
• Who may participate as a platform Single/
provider or network user Multiple
• Single sponsorship:
• eBay, ?? Sponsor:
• Skype’s VOIP, Single/
• Apple’s iOS Multiple
• Multiple sponsorship:
• IEEE’s WLAN network technology • Platforms may be sponsored or unsponsored (may not have an obvious
standards (802.11g) sponsor: internet; internal combustion engine powered transportation)
• Android • In case of internet the responsibility of improving underlying core technologies
lies with several SSOs, Internet Engineering Task Force, and the WWW
• Each role may be filled by one firm or many Consortium. Governments hold the right to decide who will be the providers in
• sometimes, a single company fills both roles the respective countries
 Network and Platform: A step back
• Networked market Networked market = Instant messaging
comprises of multiple
networks NETWORK = Whatsapp Hike Mobile SMS
• Network comprises of Sponsors ?? ?? ??
• Sponsors
• Platform component Platform component ?? ?? ??
suppliers suppliers
• Providers Providers ?? ?? ??
• Platform
• Components Platform Components ?? ?? ??
• Architectures
• Rules Architectures ?? ?? ??
• Users
• Every platform-mediated Rules ?? ?? ??
network has one and only
one platform at its core
Users ?? ?? ??
• Every platform serves one
and only network
• In most contexts we use the terms “networks” and “platform” interchangeably
 Platform Types: based on Functions
Transaction partner identity is generally:
known Ex Ante
One Sided P2P Connectivity
(fax; Fedex)
• providing P2P transfer of information, goods,
passenger
• Usually have one-sided structures,
• usually users alternate between the roles of sender
and receivers
• More points connected ⇒ more valuable network ⇒
more points ⇒ so on…
Two Sided promulgating Variety
(Novelty for video games/ movies; location for
ATMs/ Wi-Fi acces points)
• Invariably serves multi-sided networks
• Elicit offers from supply-side users that vary along
heterogeneous dimensions valued by demand-side
users
• Supply side offerings are often complement to
platform goods possessed by demand side users
• More complements ⇒ more demand-side users ⇒
more complements ⇒ etc
known Ex Post
Price Setting
(Security exchanges and auctions)
• Helps users find transaction partners; AND
• help reveal prices at which users are willing
to exchange
• More buyers ⇒ more sellers ⇒ reduced
price volatility ⇒ more buyers ⇒ etc
Matching
(online- recruitment sites, dating services,
real-estate brokerage firms)
• Invariably serves two-sided networks;
• help reveal idiosyncratic requirements and
offers
• More buyers ⇒ more sellers ⇒ improved
odds of suitable transaction ⇒ more buyers
⇒ etc.
 Predicting Platform Structure
Determinant Conditions Conditions Conditions Conditions

Multi-Homing High on both sides High on only one side High for A;
Cost Low for B
Strength of At least one side uniformly Side with high multi homing High for B X have weaker
Network exhibits strong preference cost exhibits strong preference for partner
Effect for partner variety preference for partner variety
variety
Demand for Neither side exhibits a Neither side exhibits a High for A Some users (X) on both
Inimitable strong preference for strong preference for sides have strong
Features differentiated platform differentiated platform preference for
functionality functionality differentiated
Or if the preferences is Or if the preferences is functionality, so they
strong, the desired strong, the desired mono-home
functionality can be functionality can be offered
offered selectively selectively
PLATFROM WTA WTA Mono- Homing Mixed Mode
STRUCTURE on side A and Multi
homing on side B
Example DVD PDF Online subscription Two WIFI LAN standards
music 802.11(a) and 802.11(g)
Assumptions: 1) cross side network effects are positive on both sides;
2) same side network effects are neutral or positive;
3) network users can not influence the platform structure