Chapter 1 Zara: Fast Fashion from Savvy Systems
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- KEY TAKEAWAYS
- QUESTIONS AND EXERCISES
- 5.3 One-Sided or Two-Sided Markets
- Understanding Network Structure
- The Positive Feedback Loop of Network Effects
Complementary BenefitsComplementary benefits are those products or services that add additional value to the network. These products might include “how-to” books, software add-ons, even labor. You’ll find more books on auctioning over eBay, more virtual storefronts in Second Life, and more accountants that know Excel, than on any of their rivals. Why? Book authors, Second Life partners, and accountants invest their time where they’re likely to reach the biggest market and get the greatest benefit. In auctions, virtual worlds, and spreadsheet software, eBay, Second Life, and Excel each dwarf their respective competition. Products and services that encourage others to offer complementary goods are sometimes called platforms. [2] Allowing other firms to contribute to your platform can be a brilliant strategy, because those firms will spend their time and money to enhance yourofferings. Consider the billion-dollar hardware ecosystem that Apple has cultivated around the iPod. There are over ninety brands selling some 280 models of iPod speaker systems. [3] Thirty-four auto manufacturers now trumpet their cars as being iPod-ready, many with in-car docking stations and steering wheel iPod navigation systems. Each add-on enhances the value of choosing an iPod over a rival like the Microsoft Zune. And now with the App Store for the iPhone and iPod Touch, Apple is doing the same thing with software add-ons. In less than a year after its introduction, the iTunes App store boasted over fifty thousand applications, collectively downloaded over one billion times. The iPod EconomyThese three value-adding sources—exchange, staying power, and complementary benefits—often work together to reinforce one another in a way that makes the network effect even stronger. When users exchanging information attract more users, they can also attract firms offering complementary products. When developers of complementary products invest time writing software—and users install, learn, and customize these products—switching costs are created that enhance the staying power of a given network. From a strategist’s perspective this can be great news for dominant firms in markets where network effects exist. The larger your network, the more difficult it becomes for rivals to challenge your leadership position. KEY TAKEAWAYS
QUESTIONS AND EXERCISES
5.3 One-Sided or Two-Sided Markets?LEARNING OBJECTIVESAfter studying this section you should be able to do the following:
Understanding Network StructureTo understand the key sources of network value, it’s important to recognize the structure of the network. Some networks derive most of their value from a single class of users. An example of this kind of network is instant messaging (IM). While there might be some add-ons for the most popular IM tools, they don’t influence most users’ choice of an IM system. You pretty much choose one IM tool over another based on how many of your contacts you can reach. Economists would call IM a one-sided market (a market that derives most of its value from a single class of users), and the network effects derived from IM users attracting more IM users as being same-side exchange benefits (benefits derived by interaction among members of a single class of participant). But some markets are comprised of two distinct categories of network participant. Consider video games. People buy a video game console largely based on the number of really great games available for the system. Software developers write games based on their ability to reach the greatest number of paying customers, and so they’re most likely to write for the most popular consoles, first. Economists would call this kind of network atwo-sided market (network markets comprised of two distinct categories of participant, both of which that are needed to deliver value for the network to work). When an increase in the number of users on one side of the market (say console owners) creates a rise in the other side (software developers), that’s called a cross-side exchange benefit. The Positive Feedback Loop of Network EffectsIM is considered a one-sided market, where the value-creating, positive-feedback loop of network effects comes mostly from same-side benefits from a single group (IM members who attract other IM members who want to communicate with them). Video game consoles, however, are considered a two-sided network, where significant benefits come from two distinct classes of users that add value from cross-side benefits by attracting their opposite group. In the game console market, more users of a console attract more developers who write more software for that console, and that attracts more users. Game availability is the main reason the Sony PlayStation 2 dominated over the original Xbox. It is possible that a network may have both same-side and cross-side benefits. Xbox 360 benefits from cross-side benefits in that more users of that console attract more developers writing more software titles and vice versa. However, the Xbox Live network that allows users to play against each other has same-side benefits. If your buddies use Xbox Live and you want to play against them, you’re more likely to buy an Xbox. KEY TAKEAWAYS
QUESTIONS AND EXERCISES
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