Skip to main content

Apple: The King of the Network Effect

It goes without saying that Apple creates popular, great looking, and all around great quality products.  It’s hard for one to walk around a college campus and not find someone working on their MacBook Pro, listening to their iPod, or talking on their iPhone.  These great looks and quality components usually come at a price though – a very hefty price: it is not uncommon at all to find an Apple product priced significantly higher than a competitor’s comparable product.  With the rise in popularity of Apple products, many electronics manufacturers have risen to the challenge to try to best Apple and have created many comparable products – most of which come at a significantly cheaper price, offering similar if not better specifications.  For example, the Samsung Galaxy Tab 10.1 offered specs and a design that were on par with, if not better than, the iPad 2 for right around the same cost, and the Dell 15z laptop offered very similar specs and design for a significantly lower price than the Apple MacBook Pro 15 inch.  Why then, with all of these comparable products often at lower prices or with better specs, does Apple continue to outsell most of its competitors?  My answer:  Network affects.

We can see from the explanation above already where network affects are coming into play.  We have two very comparable products that have similar specs and designs (let’s say the Dell 15z and the MacBook Pro) and one of them is significantly cheaper than the other, but still people buy many more of the expensive product.  From this, we can conclude that there must be something else that is influencing the decision.  We can also look at this in a more technical view.  If we gave each consumer a name x, where x is a real number between 0 and 1, we can create a graph showing what a product is worth to someone, r(x).  From this graph, we can determine the fraction x* of the population that would buy a product for a given price (ignoring network effects).  With two products that are fairly similar, but one being significantly cheaper than the other, we would expect x* for the cheaper product to be much greater than x* of the more expensive product.  With Apple products, though, we usually see the opposite.

What can cause this kind of flourish, even though for all intents and purposes people should buy the other, cheaper product?  As stated above, a network effect.  Through clever uses of advertising and marketing, Apple has painted its products not as simply a laptop or a smartphone, but something more. From this, they were able to build a large fan base, and a network effect took place after that.  People purchasing a tech product may be influenced by the fact that they’ve seen many people, possibly friends, family, or coworkers, using Apple products, causing them to lean more towards the Apple product, even if it costs more.  The opposite can be true for the other products: the average consumer doesn’t normally see many of these products around, therefore they may not want the product even though it is in their price range and offers the functionality they need.  This network affect can be represented by f(z), where f is a function of the percent of the population using the said product, and applied the analysis used in the previous paragraph.  When graphing r(x)f(z), the new function that takes into account network affects, rather than getting a straight line with a negative slope, a quadratic appears.  In this graph, purchasing the product isn’t simply decided by the price, but also by how many people already use it.

This analysis isn’t only true for Apple, though.  Many companies over the years have used network affects to their advantage.  At one point, Microsoft was in the position Apple is now, and Apple was suffering from the network effect.  At the moment, Apple is one of the many companies who are succeeding from a network effect.  In the future, though, some other company could dethrone Apple from its current perch and claim a leading role in the tech world.  For now, at least, Apple is one of the few companies that reign supreme.



Leave a Reply

Blogging Calendar

November 2011