PicturePhone’s Failure and Network Benefits
http://www.jstor.org/stable/pdf/25148054.pdf
While Skype, Facetime, and other video-phone services may seem like recent inventions, they were in fact all preceded by a much older technology: AT&T’s PicturePhone. The PicturePhone made its debut at the 1964 New York World’s Fair, claiming to be a revolutionary technology that would change the way we communicate forever. Unfortunately, it was a massive failure, resulting in a $500M loss. In an attempt to explain the PicturePhone’s failure, many argue that it was intrusive and superfluous – adding video took away the privacy afforded by the telephone, and didn’t add any substantial information that couldn’t be communicated solely over voice. While these factors may have played a part in PicturePhone’s demise, they do not provide a full explanation. Modern video-phone services face the exact same problems of intrusiveness and superfluousness, but have succeeded. What then, was responsible? The answer lies in the principles of networks.
In the 1950s and 60s, AT&T wanted to expand its data providing services. Telephone lines at the time didn’t have a very high bandwidth (a measure of the rate at which information can be transferred), so, in order to provide other services, AT&T would have to upgrade. This upgrade would be expensive however, and would not be possible without an market demand for such an upgrade. Enter the PicturePhone. AT&T hoped that a demand for the PicturePhone would warrant an expansion of wired infrastructure, which later technologies would be able to piggy-back off of. Because PicturePhone needed to fund this expansion of infrastructure, it was expensive, costing $300/month (adjusted for inflation) at its cheapest. This did not seem to pose a problem, however, as AT&T’s market studies showed that people would be willing to pay as much as $975/month (adjusted for inflation) for this service, provided that there were people on the other end to pick up. Unfortunately, there were not very many initial adopters of the PicturePhone. At its peak, PicturePhone only had about 500 subscribers, and usership steadily declined until the service was discontinued in 1978.
This is a prime example of equilibria in a system with network benefits – the PicturePhone didn’t have very much value if everyone you wanted to reach didn’t have one. The PicturePhone technology was too expensive, and did not have enough initial adopters to pass the “tipping point” at which the benefit of others using it helped to offset the cost. This led to a steady decline in usership until the stable equilibrium of 0 users had been obtained. If AT&T had been able to make their product more attractive (they tried to), or been able to subsidize the cost of the technology (they couldn’t due to anti-monopoly laws) they might have passed the tipping point and reached the high-stable equilibrium as Skype and other providers have done.