Mastering Strategy: Network Externalities

Financial Times: Mastering Strategy
Why the Network Effect is
so Striking?
John Paul G. Eugenio
S17 Economics for Managers
Prof. Rachel Cabato
www.jpgeugenio7.blogspot.com

Key Concepts
• Network Externalities
• Three (3) Network Types
• Industry Differences
• Five (5) General Strategies

Network Externalities
• Also known as “network spillovers” is one
of the most important characteristics of
many high-technology industries.

• In simplest terms, a product has network
externalities if the value to any one user rises
with the total number of users who also utilize
that product.

• Also known as “network spillovers” is one of
the most important characteristics of many
high-technology industries.
• In simplest terms, a product has network
externalities if the value to any one user
rises with the total number of users who
also utilize that product.

Three (3)
Network Types

1. Direct Network
• Most commonly associated with
telecommunications products such as the
telephone.

1. Direct Network
telephone.
• The network benefit arises from the
importance of direct connections.

1. Direct Network
telephone.
• The network benefit arises from the
importance of direct connections.
• The value of a widely used product is
greater than a less widely used one.

2. Indirect Network
• This is what economists would call demand
side economies of scale.

2. Indirect Network
• Example is the benefit that arises from
using a computer system with the biggest
network. More Products for Most Users.

2. Indirect Network
• Example is the benefit that arises from using
a computer system with the biggest
network. More Products for Most Users.
• Users benefit indirectly from the size of the
network.

3. Learning & Word of Mouth
• Unconventional but has similar implications.

• The bigger the network of people using a
product, the easier it is to find out
information about the goods or learn how
to use them effectively.

• The bigger the network of people using a
product, the easier it is to find out
information about the goods or learn how to
use them effectively.
• Word of mouth effect is especially important
for internet businesses.

Industry Differences
• The main distinction between network
industries and “normal” industries is that
the former are much more likely to be
dominated by a single company or standard.
• The bottom line is that you do not want to
be playing “catch-up” in a network industry.

Five (5) General
Strategies

1. SPEED
• First and most important strategy is exploiting
first mover advantages.

1. SPEED
• The value of their product will be that much
higher for potential new customers.

1. SPEED
• Getting patents,
trademarks, and
prized domain
names are integral
to this strategy.

1. SPEED
• Getting patents, trademarks, and prized
domain names are integral to this strategy.
• In the new economy there are only 2 kinds of
companies: the Quick and the Dead.

1. SPEED

1. SPEED
Samsung wins ITC patent ruling against Apple
Wednesday 5 June 2013 | 08:36 CET | News The US International Trade Commission
(ITC) has ruled that Apple infringed on a Samsung patent involving the ability of devices
to transmit multiple services through 3G technology, resulting in a ban on the
importation or sale in the US of the iPhone 3GS, iPhone 4, iPad 3G and iPad 2 3G by
AT&T, Reuters reports. President Obama has 60 days to decide whether to veto the
ruling.
While the products are over a year old, some models, including the iPhone 4 are still
selling strongly. The ruling overturned a September 2012 decision by ITC judge James
Gildea, who had found that Apple did not infringe on patents at issue. The ITC found
that Apple did not violate three other Samsung patents.
Apple said the decision had no impact on its products' availability in the US and that it
would appeal the decision. Samsung welcomed the ruling, saying it “confirmed Apple’s
history of free-riding on Samsung’s technological innovations”.
http://www.telecompaper.com/news/samsung-wins-itc-patent-ruling-against-apple--
947656

2. BUZZ
• If a company can convince customers that’s its
product will be the most widely accepted, this
will tend to be self fulfilling.

2. BUZZ
• This is where the
“BUZZ” comes in.

2. BUZZ
• This is where the “BUZZ” comes in.
• Generating consumer
“buzz” is a perfectly
viable means of
succeeding in a
network industry.

2. BUZZ
• This is where the “BUZZ” comes in.
• Generating consumer “buzz” is a
perfectly viable means of
succeeding in a network industry.
• Buzz is also a weapon used by incumbents
threatened by challengers.

2. BUZZ
iOS 7
Apple CEO Tim Cook touted iOS 7 as “the biggest change to iOS since the
introduction of the iPhone.” And it’s true. All the icons are still there in the familiar
grid, but all the felt and wood-grain design elements have been taken out to pasture.
Everything looks far more modern than it did before, and it’s all presented in a
flatter, more layered interface.
Read more: http://techland.time.com/2013/06/10/apple-unveils-new-version-of-os-
x-new-computers-and-ios-7/#ixzz2Vqxz2sDD

2. BUZZ
Samsung has just announced that the Galaxy Tab 3 will be coming in two more variants. While
we have already seen the 7-inch version, the company said that two new 8-inch and 10.1-inch
versions will be coming to markets around the globe in the beginning of June.
http://gadgets.ndtv.com/tablets/news/samsung-galaxy-tab-3-8-inch-and-101-inch-versions-officially-announced-374699

3. EARLY ADOPTERS
• Since the name of the
game in a network
industry is getting people
to adopt in order to
influence others, why not
look for the most
influential people you can
find?

3. EARLY ADOPTERS

4. PRICING AND QUALITY
• Standard strategy in an industry with network
externalities is similar to that in an industry
with large economies of scale.

• It is penetration
pricing. But its
“risky”.

• It is penetration pricing. But its “risky”.
• A great benefit to doing a better job building
the product – either better quality for the
same price, or lower manufacturing costs for
the same quality.

5. ALLIANCES
• Since the companies in this area are
effectively trying to set standards, it helps to
have powerful allies when making strategic
decisions.

5. ALLIANCES
• Since the companies in this area are effectively
trying to set standards, it helps to have
powerful allies when making strategic
decisions.
• When making alliances,
though, it is also important
to try to turn
complementary products
into commodities.

5. ALLIANCES

Mastering Strategy: Network Externalities

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Mastering Strategy: Network Externalities