network.ppt - information rules
TRANSCRIPT
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Information Rules:
A Strategic Guide to the Network Economy
Networks and Positive Feedback
Carl Shapiro
Hal R. Varian
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Information Rules Spring 982
Important Ideas
• Positive feedback
• Network effects
• Returns to scale– Demand side– Supply side
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Information Rules Spring 983
Positive Feedback
• Strong get stronger, weak get weaker
• Negative feedback: stabilizing
• Makes a market “tippy”
• Examples: VHS v. Beta, Wintel v. Apple
• “Winner take all markets”
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Information Rules Spring 984
Sources of Positive Feedback
• Supply side economies of scale– Declining average cost– Marginal cost less than average cost– Example: information goods
• Demand side economies of scale– Network effects– In general: fax, email, Web– In particular: Sony v. Beta, Wintel v. Apple
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Information Rules Spring 985
Network Effects
• Real networks
• Virtual networks
• Number of users– Metcalfe’s Law:
Value of network of size n proportional to n2
• Importance of expectations
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Information Rules Spring 986
Lock-In and Switching Costs
• Network effects lead to substantial collective switching costs
• Even worse than individual lock-in
• Due to coordination costs
• Example: QWERTY
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Information Rules Spring 987
Don’t Get Carried Away
• Network externalities don’t always apply– ISPs (but watch out for QoS)– PC production
• Likelihood of tipping– See next slide
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Information Rules Spring 988
Likelihood of Tipping
Low ScaleEconomies
High ScaleEconomies
Low DemandFor Variety
Unlikely High
High DemandFor Variety
Low Depends
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Information Rules Spring 989
Chicken & Eggs
• Fax and fax machines
• VCRs and tapes
• Internet browsers and Java
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Information Rules Spring 9810
Igniting Positive Feedback
• Evolution– Give up some performance to ensure
compatibility, thus easing consumer adoption
• Revolution– Wipe the slate clean and come up with the best
product possible
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Information Rules Spring 9811
Evolution
• Offer a migration path
• Examples– Microsoft– Intel– Borland v Lotus
• Build new network by links to old one
• Problems: technical and legal
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Information Rules Spring 9812
Technical Obstacles
• Use Creative design
• Think in terms of system
• Converters and bridge technologies– One-way compatibility
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Information Rules Spring 9813
Legal Obstacles
• Need IP licensing
• Example: Sony and Philips CDs
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Information Rules Spring 9814
Revolution
• Groves’s law: “10X rule”
• But depends on switching costs
• Example: Nintendo
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Information Rules Spring 9815
Openness v. Control
• Your reward = Total added to industry x your share
• Value added to industry– Depends on product and– Size of network
• Your share– Depends on how open
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Information Rules Spring 9816
Openness
• Full openness– Anybody can make the product– Problem: no champion
• Alliance– Only members of alliance can use– Problem: holding alliance together
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Information Rules Spring 9817
Control
• Control standard and go it alone
• If several try this strategy, may lead to standards wars
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Information Rules Spring 9818
Generic Strategies
Control Open
Compatible ControlledMigration
OpenMigration
Incompatible PerformancePlay
Discontinuity
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Information Rules Spring 9819
Performance Play
• Introduce new, incompatible technology
• Examples– Palm Pilot– Iomega Zip
• Attractive if– Great technology– Outsider with no installed base
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Information Rules Spring 9820
Controlled Migration
• Compatible, but proprietary
• Examples– Windows 98– Pentium– Upgrades
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Information Rules Spring 9821
Open Migration
• Many vendors, compatible technology
• Examples– Fax machines– Some modems
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Information Rules Spring 9822
Discontinuity
• Many vendors, new technology
• Examples– CD audio– 3 1/2” disks
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Information Rules Spring 9823
Historical Examples ofPositive Feedback
• RR gauges
• AC v. DC
• Telephone networks
• Color TV
• HD TV
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Information Rules Spring 9824
Lessons
• Positive feedback means strong get stronger and weak get weaker
• Consumers value size of network• Works for large networks, against small ones• Consumer expectations are critical• Fundamental tradeoff: performance and
compatibility
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Information Rules Spring 9825
Lessons, continued
• Fundamental tradeoff: openness and control
• Generic strategies– Performance play– Controlled Migration– Open Migration– Discontinuity
• Lessons of history