Competing in a market with network effect
Relevant link: http://www.flatworldknowledge.com/pub/gallaugher/41154#
We learned from the class that how important the network effects is. When an information cascade forms, the rest of the crowds will easily follow previous people’s choice regardless of their own information. This sounds incredible. But when you see how this phenomenon happens in the real business world, you will be shocked by the potential market it can bring for a certain product, if the product has formed an information cascade effect among the audience. Within business world, the market share and the penetrating ability of a product are crucial for the growth and the revenue of the product. That’s why so many firms competing to enter the market by creating large enough network effect. But to start a network effect is not that easy. There are so many factors that can influence the result of the networking effects. Every single tiny aspect can become the turning point for the formation of the information cascade. We know how network effects can happen in theory, but we may be interested in how this can influence the real business world. The article in the link reveals some of the important aspects a firm should concern in order to successfully start a network effect and try to gain the maximum market share from it. It also include examples from those “big name” firm’s story to demonstrate.
According to the article, it indicates that in order to succeed from network effects, a firm should arrive the market early, subsidize product adoption or providing certain promotion, form partnership or alliance with complimentary firms or even rival if needed, or even try more hard to close off rival access to the market by inventing its own system.
Timing is one of the most crucial factors that need to take in to concern when a firm try to dominate the market. From the class, we learned that in a product competition with network effects, the product that first gets over its own tipping point attracts more consumers and tend to make the other product less able to survive. From the article we can find out how this happens to eBay Japan and Microsoft’s Zune. EBay Japan arrived the market late while Yahoo! already made an influence on the Japanese market. In this situation, it’s like Yahoo already passed the tipping point in this eCommerce market and resulted in a network effect being formed. This made eBay Japan hard to penetrating the market and gain market share. Since everyone was used to Yahoo!’s trading system and they were not willing to switch. As a result, eBay lost billions in sales. This indicates that timing is really important if a firm wants to dominate a market. However, if firm A first passing the tipping point and dominate the market, there is still chance for firm B to regain the market share and overtake firm A if it improves itself, as we learned from the class. Like Sony’s PlayStation 2 dominated the market since it was introduced to the market 18 months earlier than Xbox. However, Sony still lost its sales when Xbox 360 was introduced earlier than its PS3.
Furthermore, rather than the above factors, trying to hinder rival’s access to a firm’s market is another strategy for the world with network effects. One of the renowned examples is Apple’s success. As discussed in the article, Apple has a closed system that prevents “rivals to write a software emulator like Boot Camp that would let Windows PCs drink from the Mac milkshake”. Since Apple has such a closed system, it tends to have fewer competitors. Moreover, all its products, such as iPhone, iPad, touch are all based on its iOS system and have app store and iTunes store which make the switch between Apple’s product quite easily. This would bring customers’ loyalty and even form an information cascade for a single customer. For example, if a customer bought a Mac, he would more likely to buy a Mac rather than a PC, since he knows the quality of Apple, and more familiar with the system behind it. However, one crucial step need to do before using the closing rival access off strategy is the company must take enough promotion and already form a network effect in the market, so that people would be willing to use its product, since consumer would only use a product if he knows it’s good.
Overall, in a market where network matters, it is important to control the timing, promotion, price and rival’s compatibility with its users in order to succeed.