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Networks, Tech, and the Changing Market

At a recent Apple conference, almost everyone was shocked by a surprise guest nobody would have expected: Microsoft.  Why is this surprising?  As The Verge points out, Microsoft has not been to an Apple conference in years.  Even though they have cooperated in the past, the two have kept their product lines largely separate from each other for a long time, and Microsoft’s willingness to present at an Apple conference effectively summarizes what has been a massive shift in the market.  From a networks perspective, however, more forces have been at play: the Structural Balance Property and Game Theory.  Why is Microsoft willing to demonstrate the power of Office for iPad Pro?  Isn’t the iPad Pro a Surface competitor?  Wouldn’t Microsoft be better off forcing consumers who want Office to purchase a Microsoft product?  If one considers how the technology market has evolved in recent years, it becomes clear that the technology market has, in recent years, become rather unbalanced.

Consider the following three nodes in a simplified graph of the market: The consumer, Apple products, and Microsoft products.  In the 90’s and early 2000’s, these three nodes were fairly distinct and balanced: consumers who had a positive relationship with Apple products tended to have a negative relationship with Microsoft products for compatibility reasons, convenience, etc., and vice-versa.  Consider the following triads (red denotes a negative relationship, and green denotes a positive relationship. Post 1 img 1a

 

Apple and Microsoft had a “negative” relationship, so the triad with two negative relationships and one positive relationship was balanced.  Now, however, the graph is not so simple.  As of today, there are many separate nodes relating to different aspects of a consumer’s digital life: their email service, their productivity software, their phone, and more.  A consumer might have a positive relationship with Google’s Android, Google’s Gmail, Microsoft’s Office, and Apple’s iPad.  In a graph like this, retaining the original relationships in the triads no longer satisfies the Structural Balance Property.  We can include some of the competing products to reveal a much more complex graph such as the following (which represents one possible consumer, but many more complex variations could and do exist).  In the following example, nodes connected without an edge means that they are unrelated products which do not compete with each other.

Post 1 img 2a

 

In this far more complicated graph, there are already some balanced triads.  For example, both the iPad and Google Docs work together and do not like Microsoft Office.  This triad is balanced, but is irrelevant to nodes such as the consumer.  One triad that is particularly important to both Apple and Microsoft is the Consumer-iPad-Office triad.  This triad is not balanced because the consumer likes both iPad and Office, but the fact that the two have a negative relationship requires the consumer to choose one or the other.  In this case, both companies can only stand to benefit from a newfound positive relationship with each other.  We can further analyze this triad from a simple Game Theory perspective.

Post 1 img 3a

This analysis, although simplified for the sake of argument, illustrates an important aspect of today’s market: if the two tech giants failed to cooperate, consumers would be forced to choose and, as a result, both would be losing sales.  The Nash Equilibrium of this particular payoff matrix occurs where the two both choose to cooperate, and this was reflected in the recent Apple press conference.  Finally, let’s consider a graph in which Microsoft chooses to cooperate with more of its “enemies”.

Post 1 img 2b

 

In this example, the unbalanced triads are ones such as Consumer-Android-Office, which is one from which Microsoft actually only stands to gain.  The consumer in this example might prefer iPhone and be annoyed by how Android operates, but Microsoft is opening itself up to all of the Android users in addition to the iPhone users.  Furthermore, both the Consumer-iPhone-Office and Consumer-iPad-Office triads are now balanced, and both Microsoft and Apple receive higher payoffs this way.  By analyzing this relationship, we can see how two industry giants have made appropriate strategic decisions which follow the conventions of network and market theory.

 

Reference source:

http://www.theverge.com/2015/9/10/9300175/new-microsoft-software-services-ipad-pro

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