Network Effect and the Failure of the Picturephone
https://www.jstor.org/stable/pdf/25148054.pdf
The “Picturephone” was a revolutionary product created by AT&T and introduced at the 1964 New York World’s Fair. It was essentially an early version of FaceTime or Skype, a system that transmitted the user’s image and voice simultaneously. However, despite the companies optimism about the product, it failed miserably. Following its introduction in 1964, it was slow to pick up traction, and by 1978 the only Picturephones remaining sat on desks at Bell Labs. The question of interest is why a product that “consumed millions of dollars, received the full backing of the world’s largest private corporation, and was conceived in millennial terms and the communications technology of the future” failed so miserably.
One of the main reasons cited for the failure of this technology relates to the concepts of network effects we have discussed in this course. The Picturephone is a technology that is subject to network effects as its value increases with each additional user. As such, you need to convince a large initial group to adopt your product before others will be willing to buy it. As we learned in class, one key strategy that companies can take in order to tip a market in favor of growth is to set a low, introductory price for the good (perhaps even offering it for free). Although this may result in early losses, if the product catches on the company can raise the price and hopefully make enough profit to offset this initial loss. The reason that this concept is relevant to Picturephone and its failure is that the product was created by AT&T, which was a monopoly. As a monopoly, they were subject to regulatory laws that prohibited “cross subsidizing,” introducing the technology at low rates to build demand. Accordingly, they were unable to get enough initial adopters to get past the tipping point and thus the Picturephone failed.