Matthew

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Matthew

  1. 1. Networks and Positive Feedback “United we stand, divided we fall.” “The more, the merrier!” Matt Grace 6 February 2001
  2. 2. “Old” vs. “New” Economies Economies of Scale Economics of Networks “ New” “ Old” Positive Feedback Network Externalities
  3. 3. Positive Feedback <ul><li>Success begets success. </li></ul><ul><li>Failure breeds failure. </li></ul><ul><li>Why is it important in the “new” economy? </li></ul><ul><ul><li>NETWORKS! </li></ul></ul><ul><ul><ul><li>Mac users, CDs, Nintendo 64 </li></ul></ul></ul><ul><ul><ul><li>“Bigger is better”. </li></ul></ul></ul>
  4. 4. Cycles and Growth <ul><li>Leads to extremes in markets – dominance. </li></ul><ul><ul><li>Negative feedback too = a happy medium. </li></ul></ul><ul><li>Not always represents “growth”. </li></ul><ul><ul><li>Virtuous cycle – Internet growth of late 90’s. </li></ul></ul><ul><ul><li>Vicious cycle – Apple Mac </li></ul></ul><ul><li>“ Tippy” markets </li></ul><ul><ul><li>Two firms compete and one wins. </li></ul></ul><ul><ul><ul><li>56Kbps modems, VHS vs.Beta, Wintel vs. Apple </li></ul></ul></ul>
  5. 5. Big Winners <ul><li>Use positive feedback to propel technology. </li></ul><ul><li>Patience and foresight. </li></ul><ul><li>And of course – LUCK! </li></ul><ul><li>Case: Nintendo vs Atari </li></ul><ul><ul><li>Popularity fuelled demand. </li></ul></ul><ul><ul><li>Popularity enticed game developers. </li></ul></ul><ul><ul><li>S-curve. </li></ul></ul>
  6. 6. Demand-Side Economies of Scale <ul><li>Supply-side </li></ul><ul><ul><li>Auto industry. </li></ul></ul><ul><ul><li>Natural limit imposed by size of organization. </li></ul></ul><ul><li>Demand-side </li></ul><ul><ul><li>Microsoft, Lotus 1-2-3. </li></ul></ul><ul><ul><li>Scale doesn’t dissipate when market gets large. </li></ul></ul><ul><ul><li>Popularity vs. Value-to-user. </li></ul></ul>
  7. 7. A Revelation… <ul><li>Consumer expectations, and LUCK, drive success or failure as much as the underlying product value. </li></ul><ul><li>Thus, marketing strategy is critical. </li></ul><ul><ul><li>Create the “Aura of Inevitability”. </li></ul></ul><ul><ul><li>First-to-market is NOT decisive. </li></ul></ul>
  8. 8. In the Network Economy <ul><li>The “Double-whammy” </li></ul><ul><ul><li>Growth in demand side both reduces cost on the supply side and makes the product more attractive to other users. </li></ul></ul><ul><ul><ul><li>Especially strong positive feedback. </li></ul></ul></ul>
  9. 9. Network Externalities <ul><li>“Networks” – either real or virtual. </li></ul><ul><li>“Externalities” – one participant affects another without compensation. </li></ul><ul><ul><li>Negative = pollution </li></ul></ul><ul><ul><li>Positive = joining a network </li></ul></ul><ul><li>Metcalfe’s Law (Mr. Ethernet) </li></ul><ul><ul><li>Total network value is proportional to N 2 – N , where N is users. </li></ul></ul>
  10. 10. Collective Switching Costs <ul><li>The Challenge to the Competitor: </li></ul><ul><ul><li>Must overcome COMBINED switching costs of ALL users. </li></ul></ul><ul><ul><ul><li>These costs are single biggest force favoring incumbents. </li></ul></ul></ul><ul><ul><ul><li>Non-linear nature of effort to switch large groups of people. </li></ul></ul></ul><ul><li>QWERTY vs Dvorak keyboards. </li></ul>
  11. 11. Current Trends <ul><li>Sun Microsystems </li></ul><ul><ul><li>Open Net Environment (SUN ONE) </li></ul></ul><ul><ul><ul><li>Complete architecture, roadmap and product portfolio </li></ul></ul></ul><ul><li>3G Wireless technology </li></ul><ul><ul><li>So much spent on licenses, will operators ever realize demand side economies of scale? </li></ul></ul><ul><ul><li>Will operators be able to “sell” their gadgets? </li></ul></ul><ul><ul><li>Can they cover collective switching costs from wired access? </li></ul></ul>
  12. 12. Discussion <ul><li>LUCK vs. VISION </li></ul><ul><li>In modern networks, is it feasible to guide expectations? </li></ul><ul><ul><li>Is marketing enough? </li></ul></ul><ul><ul><li>Is consumer so naïve with so many resources available? </li></ul></ul><ul><li>Will competition shatter current networks, thus destroying value? </li></ul><ul><ul><li>Does consumer gain from this game? </li></ul></ul>

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