Network Effects in the Competition Between PS4 and Xbox One
The competition between manufacturers of video game consoles, like that between operating system or mobile phone developers, is hugely influenced by network effects and direct benefit effects. Perhaps the most important factor in this situation is that the console with the largest user base is far more likely to have a wider selection of games, thereby making itself more appealing to potential future users. There are also more direct benefits to choosing the more popular console, however–if a console is more popular, more of your friends are likely to have it. This means that you will be able to play games online with your friends (as most online services are specific to the particular console), but it also means you will be able to play the same console-exclusive games as your friends and discuss them together.
This lends itself to two different models for considering these effects. The first is the network effect of the availability and number of titles released, which is based on the total proportion of the population using a certain console. This can be modeled using the simple model for network effects that accounts for only the proportion of the whole population, x*, that uses the product. The network effect created by a desire to have the same console as your friends, however, is much more localized and must be treated by considering the underlying social network graph. A combination of these two effects, among other factors, drives users to choose a certain console over others.
In the current console race, with the PS4 and Xbox One as the major competitors, we can see that network effects are providing a large advantage to Sony’s PS4. One reason for this is that network effects are impacted hugely by minor variations early in a product’s lifecycle, while user bases are still being built up. Once that happens, it is much more difficult to make up ground. Prior to the release of its console, Microsoft announced that the Xbox One would require a constant Internet connection to play even disc-based games, and that they would prevent the resale of used games. This turned out to be a very unpopular decision, and despite reversing these statements before the console’s release, the public’s negative reaction to this decision began the network effects in favor of the PS4 that Microsoft has been working to overcome ever since.
Since then, Microsoft has been trying everything possible to work past these network effects, attempting to both increase the value and lower the price of their console to obtain more users and have their system succeed. They began giving away free games with a purchase of the console, and lowered its price by a substantial amount. However, the PS4, despite keeping its business model relatively constant since release, still outsells the Xbox One by a substantial margin. This demonstrates just how difficult it can be to overcome network effects working against you, even for a company as large and influential as Microsoft.
http://www.techdigest.tv/2014/08/state-of-the-race-ps4-on-10-million-xbox-one-on-5-million.html