MD240 - Management Information Systems Oct. 25, 2005 Network Externalities: The Kingmaker of Tech Industry Competition

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MD240 -Management Information SystemsOct. 25,
2005Network ExternalitiesThe Kingmaker of Tech
Industry Competition
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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

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Network Externalities(a.k.a. Network Effects,
Metcalfes 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
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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
  doesnt always win

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Software
Operating Systems control hardware and provide an
environment in which applications execute
Application Programs end-user program that
performs a specific function Individual examples
word processor, spreadsheet. Collections of apps
Office (suite), SAP R/3 (ERP) Applets small
application programs which execute within a
larger environment (e.g. Java applets within
browser)
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Competition in the OS Space
Personal Computers Windows XP Apple
Mutli-User Systems Windows 2000 Windows
Server2003 Unix (Sun, IBM, HP / Compaq) Linux
Consumer Devices Windows Mobile Ultimate
TV Xbox Tablet PC Windows XP Media Center
Edition Palm (handheld) Liberate (set
top) Sony Linux
Microsoft Competition
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A Growth Stock No More?
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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.

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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\itb
ar.cpp// should be fixed in the apps
themselves. Morons! .
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Fear the Penguin?
Server Market
Desktop Market
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16 Bit Game Consoles
Source Schilling 2003
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32/64 Bit Game Consoles (failed)
Source Schilling 2003
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32/64 Bit Game Consoles
Source Schilling 2003
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128 Bit Game Consoles
Source Schilling 2003
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Components of Consumer Value for Network Goods
Panel B New entrant, compatible with existing
installed base and complementary goods
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Components of Consumer Value for Network Goods
Switching Costs (stability)
Technological Functionality
Installed base (exchange)
Complementary Goods Availability (extrinsic
benefits)
Panel A Incumbent product
Panel C New, incompatible entrant
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Competing in a Standards Battle

• Tactics 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 (Xbox500 million
marketing budget, 3DO 37 million)