Networks

1
Networks Positive Feedback
2
2 Types of networks in the information economy

• Physical networks telephone, tv-cable, GSM, fax,
  ATM
• Virtuale networks Linux-users, Mac users, MP3.

3
The biggr the network, the more attractive

• Network effects
• Network externalities
• Demand side economies of scale

4
In comparison with classical economy

• Demand side economies of scale, with diminishing
  scale effects. (E.g. General Electric, or the
  mythical man month, IBM)
• Netwerk economics are however not new logistics
  service providers, airline industry, shopping
  malls (postal service, telecommunication
  networks).

5
What is already known

• Large companies try to maintain a network which
  is as large as possible

connections 54321 1/265 15 After
the red node has joined connections 615
1/276 Network of n nodes 1/2n(n-1)
6
Network externalitiesMetcalfes law

• The value of a network goes up as the square of
  the number of users.
• Externalities activities of market participants
  influence one another without payments being
  exchanged.

7
Tippy markets markets in which one player will
survive

• Eventual resultat of strong network effects
• winner takes all (for the time being)
• Video (VHS, Betamax, Philips 2000)
• modems
• pc operating systems

8
Example gamecomputers

• 1985 Atari rules,
• 1985 Nintendo enters with Nintendo Entertainment
  System
• 1986 Nintendo has mor sales
• Development companies want to work fir Nintendo,
  Nintendo forces that games are constructed
  exclusively for them.

9
Collective Switching Costs

• 1870 type machines machine with which copying
  was easier than by hand
• Qwerty keyboard
• Introduced in 1870 to slow the typist down!
• Besides, it made it very easy for
  salesrepresentatives to type typewriter.

10
Collective switching cost (cont.)

• Typewriters were technically improved
  significantly during the 19th century
• The Dvorak keyboard (AOEUIDHTNS) turns out te be
  much faster (and there is no need to slow down
  anymore)
• No one switche because
• Individual switching costs
• We want to stay with the big network
• Collective switching costs (coordination)

11
Under what circumstances are markets tippy?
12
Strategies to create a network that is large
enough for positive feedback

• Evolution high downward compatibility(low
  switching costs), low performance improvement
  (small benefit).
• Revolution no downward compatibility (high
  switching cost), high performance improvement
  (high benefit).

13
Another strategic choice

• Openness versus control

14
4 strategies in netwerk markten
15
Performance play

• Introduce a new incompatible technology, en
  protect all rights.
• Example Nintendo

16
Controlled Migration

• Introduce a new backward compatible technology,
  whose rights are protected.
• ExampleWindows 98,

17
Open migration

• Introduceer a backward compatible technology
  whose rights are not protected
• Example Acrobat reader

18
Discontiuiteit

• Introduce a non backward compatible technologie,
  whose rights are not protected.
• Example CD.

19
Which standards/network wars are currently being
fought?

• Operating systems for mobile devices
• UMTS platforms
• Web(service) development platforms
• .NET versus Java

20
Examples of positive feedback

• 1860 In the US there are several widths of
  railway track.
• In the south, mostly 5. In the north ,mostly
  4.8 1/2.
• The big north east lines were being extende to
  the west
• The southern states left the parliament
• The southern states los the civil war
• In the end everything was 4.8 1/2.

21
AC DC

• 1882 the first electricity networks were build
• DC by Thomas Edison
• A (alternating) C by Westinghouse.
• AC was easier to transport on long distance
  initially much AC in the country side, DC in the
  cities

22
AC DC

• Edison used his patents in the standards war, for
  example patterns on lighting. (and even on the
  electric chair)
• polyphase AC appeared to be a superior technology
• A converter from DC to AC was developped
• Edison himself got out of business
• AC became the standard

23
Color TV

• 1941 introduction of the color TV
• NBC was owned by RCA, a television producing
  company
• CBS launched a mechanical color TV
• RCA tried to slow CBS down, for example by
  explaining that the system was not backward
  compatible

24
TVs

• 1950 CBS versus RCA color TV test. CBS wins. the
  monkeys were green, the bananas were blue, and
  everyone had a good laugh. (says director of
  RCA)
• RCA attempts to enlarge its installed base,
  continues to critize CBS, en doubles RD.
• CBS couldnt produce many TVs.

25
TVs

• Government stops color TVproduction because of
  Korean War
• 1952 RCA finally got a working color TV, patents
  it, and has 23 million customers on balck white
  television.
• RCA wins lobby,
• 1953. CBS withdraws.
• Until 1963, only 3 color TVs.
• 60s RCA starts to develop content to make it
  more attractive