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

MD240 - Management Information Systems Oct. 25, 2005 Network Externalities: The Kingmaker of Tech Industry Competition. Topics Covered. Network Externalities Defined, Strategic Importance, Examples Operating Systems & Hardware Markets

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

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

  2. 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

  3. Network Externalities(a.k.a. Network Effects, Metcalfe’s 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

  4. 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 doesn’t always win

  5. applications operating system • Operating Systems • control hardware and provide an environment in which applications execute Software • 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)

  6. Competition in the OS Space Microsoft Competition Consumer Devices Windows Mobile Ultimate TV Xbox Tablet PC Windows XP Media Center Edition Palm (handheld) Liberate (set top) Sony Linux Personal Computers Windows XP Apple Mutli-User Systems Windows 2000 Windows Server2003 Unix (Sun, IBM, HP / Compaq) Linux

  7. A Growth Stock No More?

  8. 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. The Microsoft Stimulus Package

  9. 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\itbar.cpp:// should be fixed in the apps themselves. Morons! .

  10. Fear the Penguin? Desktop Market Server Market

  11. Source: Schilling 2003 16 Bit Game Consoles

  12. Source: Schilling 2003 32/64 Bit Game Consoles (failed)

  13. Source: Schilling 2003 32/64 Bit Game Consoles

  14. Source: Schilling 2003 128 Bit Game Consoles

  15. Switching Costs (stability) Compatible technologies can tap into the same installed base and complementary products as the incumbent. This dramatically lowers (or eliminates) switching costs, leaving the products to compete on technical functionality. Switching Costs (stability) Technological Functionality Technological Functionality Installed base (exchange) Installed base (exchange) Complementary Goods Availability (extrinsic benefits) Complementary Goods Availability (extrinsic benefits) Panel A Incumbent product Components of Consumer Value for Network Goods Panel B New entrant, compatible with existing installed base and complementary goods

  16. Radical innovation may be necessary if an incompatible technology is to overthrow an established standard. The technical benefits of the new innovation must exceed the exchange, extrinsic, and stability benefits of the incumbent. Technological Functionality Components of Consumer Value for Network Goods Switching Costs (stability) Technological Functionality Installed base (exchange) Complementary Goods Availability (extrinsic benefits) Panel C New, incompatible entrant Panel A Incumbent product

  17. 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 Competing in a Standards Battle Signaling can be used by both: Pre-announcements, credible commitments (Xbox=$500 million marketing budget, 3DO = $37 million)

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