BSAD 281.66: Technology Management - Chapter 10 Notes

Platforms, Network Effects, and Competing in a Winner-Take-All World

Section 10.1: Introduction to Network Effects and Platforms

• Network Effects: The value of a product or service increases as the number of users expands.
  • Also referred to as “network externalities” or “Metcalfe’s Law.”
  • The presence of network effects is a critical factor in product/service selection.
• Platforms: Products and services allowing the development and integration of software products and complementary goods, creating an ecosystem of value-added offerings.

Section 10.2: Sources of Value in Network Effects

• Exchange:
  • A network's value increases as users can communicate/interact with more people.
  • Firms leverage technology to represent exchanges digitally (messaging, movies/music, money, video games).
• Staying Power:
  • Networks with more users suggest stronger staying power, indicating long-term viability.
  • Switching Costs: Costs incurred when moving from one product to another, directly related to staying power.
    • Strengthen the value of network effects and increase with friction preventing users from switching to rivals.
  • Total Cost of Ownership (TCO): An economic measure of the full cost of owning a product.
• Complementary Benefits:
  • Products or services that add additional value to the primary network product/service.
  • Platforms: Allow integration of software products and other complementary goods.
  • Many firms provide APIs (Application Programming Interfaces) to allow third-party integration.
  • Value-adding sources (exchange, staying power, complementary benefits) reinforce each other, strengthening the network effect.

Roblox: A Case Study

• Roblox is a virtual world where users can create and share games/experiences.
• By the end of 2020, Roblox had over 150 million members and averaged over 32 million daily active users.
• Creating involves coding, seen positively by parents.
• Users can sell creations for Robux.
• Roblox benefited from the pandemic, with 2022 revenues climbing to 2.2 billion.
• Low marketing costs due to virality and young fan base.
• Customer Acquisition Costs (CAC) are very low (around 6.2 percent of revenue spent on marketing).
• Seen as an important test-base for the metaverse.

Section 10.3: Network Structure - One-Sided vs. Two-Sided Markets

• One-Sided Market: A market deriving most of its value from a single class of users (e.g., messaging).
  • Same-Side Exchange Benefits: Benefits derived by interaction among members of a single class of participant.
• Two-Sided Market: Markets comprised of two distinct categories of participants, both needed for the network to function (e.g., video games).
  • Cross-Side Exchange Benefit: An increase in users on one side of the market increases value for the other side.
• A network can have both same-side and cross-side benefits (e.g., Xbox).
  • Cross-side: More users attract more developers.
  • Same-side: Xbox Live enables users to play against each other.

Electrical Vehicle (EV) Charging Standards: A Battle of Networks

• Two main incompatible standards:
  • Tesla’s NACS (North American Charging Standard)
  • CCS (Combined Charging System): Used by virtually all other EVs in North America
• NACS appears to be winning due to:
  • Tesla's head start and large market share.
  • More charging ports and prime locations.
  • Closed system offering exceptional convenience.
  • Superior plug size and power compared to CCS.

Section 10.4: Competition in Network Markets

• Network markets experience early, fierce competition due to the positive-feedback loop.
• Aggressive early-stage tactics are common; the leader gains disproportionate advantage.
• Markets tend toward monopolistic tendencies.
  • Monopoly: Many buyers, one dominant seller.
  • Oligopoly: Market dominated by a small number of powerful sellers.
• The best product/service doesn't always win because of network effects.
• Technological Leapfrogging: Competing by offering a superior technology that overcomes resistance due to exchange, switching costs, and complementary benefits.

Innovation in Network Markets

• Network effects can limit competition against the dominant standard, but innovation within the standard can flourish.
• Programmers invest in writing software for dominant platforms (e.g., Windows).
• Diverse early mobile phone market lacked a standard, making broad software development difficult.

Section 10.5: Strategies for Competing in Markets with Network Effects

• Move Early: (Yahoo! auctions in Japan, Amazon in Cloud Computing, Microsoft's OpenAI investment).
• Subsidize Product Adoption: (PayPal, Zoom). Freemium models are a form of subsidy.
• Leverage Viral Promotion: (Uber, TikTok, Shein, Temu).
  • Social Proof: Positive influence when others are doing something.
• Expand by Redefining the Market: (Nintendo Wii, Cash App's embrace of crypto, Nvidia in AI) or through convergence (iPhone).
  • Blue Ocean Strategy: Create and compete in uncontested market spaces.
  • Convergence: Distinct markets begin to offer similar features.
  • Envelopment: One market attempts to conquer another by making it a subset of its offering.
• Form Alliances and Partnerships: (NYCE vs. Citibank, Didi/Ola/GrabTaxi/Lyft vs. Uber).
• Establish Distribution Channels: (Java with Netscape; Microsoft bundling Media Player with Windows; Apple embedding Apple Music).
• Seed the Market with Complements: (Blu-ray, Nintendo, thredUP).
• Encourage Complementary Goods Development: Offer resources, subsidies, market research, development kits, and training (Oculus and Amazon Echo developer funds, Apple Swift Playgrounds).
• Maintain Backward Compatibility: (Apple's Rosetta 2, Samsung Pay using mag-stripe).
  • Backward Compatibility: Ability to use complements developed for prior generations.
  • Adaptor: A product that taps into another product's complements, data, or user base.
• Compatibility for Rivals: (Samsung Pay and magstripe).
• Continuous Innovation for Incumbents: (Apple blocking access to its systems).
• Preannouncements for Large Firms: (Microsoft, Apple).
  • The Osborne Effect: Preannouncing a product causes a sales drop in current products.

Lessons from Meta's Threads

• Meta launched Threads as a competitor to Twitter, leveraging Instagram's account system.
• Initial success, but usage crashed due to limitations (e.g., inability to create a new account without Instagram).
• Lessons:
  • Customers abandon sites if changes reduce usability.
  • Platforms can leverage their user base to grow new platforms quickly.
  • Competitors need to offer a full-featured alternative.

Too Much of a Good Thing? Congestion Effects

• More users attract more users, but too many can overwhelm a service.
• Congestion Effects: Increasing users lower the value of the product/service due to resource scarcity.
• Examples: SimCity launch failures, Twitter's early infrastructure issues, attention scarcity for social media users.

Section 10.6: Apple's Entry into Banking

• Apple has moved into fintech with Apple Wallet and Apple Pay.
  • Banks pay Apple 0.15 percent of Apple Pay transactions.
  • Generated 782 million in Apple Pay revenue in 2022.
• Launched Apple Card Credit Card in 2019, competing with banks.
• Launched Apple buy-now-pay-later (BNPL) program in 2023.
• Major banks formed Paze to compete, late to the game.
• Rivals have struggled to create successful digital payments platforms.

Section 10.7: The Zoom Boom

• Eric Yuan, like many disruptive innovators, left a major player (WebEx) after being rebuffed on improvement ideas.
• Zoom focused on addressing WebEx complaints:
  • Easy installation and use.
  • Improved call reliability.
  • Feature-rich offering.
  • Simple pricing.
• Easy signup and viral promotion.
• Freemium: A product with a free version (limited features/time) to entice customers to purchase a subscription.
• Zoom appealed to corporate customers, casual users, and schools.
• Zoom emerged as best-in-class during the pandemic:
  • Low-cost, superior version.
  • Early adoption from schools.
  • Free access for K-12 schools.
  • User base increased twenty-fold in four months.
  • Rapid response to issues.
• Slower growth after vaccines and return to in-person activities.
• Lessons:
  • Focus on customer needs to create opportunities.
  • Ease-of-use broadens the target market.
  • Cheap and straightforward pricing.
  • Rapid response is vital.