8.3 PLATFORMS/NETWORK EFFECTS

one-sided market

A market that derives most of its value from a single class of users (e.g., instant messaging).

same-side exchange benefits

Benefits derived by interaction among members of a single class of participant (e.g., the exchange value when increasing numbers of IM users gain the ability to message each other).

two-sided, number, rise, cross-side

But some markets comprise two distinct categories of network participants. 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, so they're most likely to write for the most popular consoles first. Economists would call this kind of network a _____-______ market (network markets that comprise two distinct categories of participant, both of which are needed to deliver value for the network to work). When an increase in the _______ of users on one side of the market (console owners, for example) creates a _____ in the other side (software developers), that's called a _______-_______ exchange benefit(software developers)..

one-sided, messaging

In ____-_______ markets, users gain benefits from interacting with a similar category of users (think __________ apps, where everyone can send and receive messages to and from one another).

two-sided,

In ____-_________ markets, users gain benefits from interacting with a separate, complementary class of users (e.g., in the mobile payment business, payment app-wielding consumers are attracted to a platform because there are more merchants offering convenient payment, while merchants are attracted to a payment system that others will actually use and that yields clear benefits over cash).

two-sided

It's also possible that a network may have both same-side and cross-side benefits. Microsoft's Xbox 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. Apple also created a _____-______ game in messaging when it turned iOS messaging into a platform, allowing app developers to add all sorts of new capabilities, from custom emojis and animations to collaborative apps shared via what used to be simple text messaging.

positive-feedback, end

Messaging is considered a one-sided market (or one-sided network), where the value-creating, ________-________ loop of network effects comes mostly from same-side benefits from a single group (messaging members who attract other members who want to communicate with them). Mobile payment efforts like Square, Apple Pay, and Android Pay, however, are considered to be two-sided markets, where significant benefits come from two distinct classes of users that add value by attracting each other. In the case of mobile payments, the more people who use a given payment platform, the more attractive that platform will be to storefronts and other businesses, and if more businesses accept these forms of mobile payment, then this in turn should attract more _____ consumers (and so on). Jump-starting a two-sided network can be tricky.

two-sided market

Network market that comprises two distinct categories of participant, both of which are needed to deliver value for the network to work (e.g., video game console owners and developers of video games).

structure, class, messaging, same-side

Understanding Network Structure To understand the key sources of network value, it's important to recognize the _________ of the network. Some networks derive most of their value from a single ________of users. An example of this kind of network is _________. While you might have different messaging apps for different purposes (Snapchat for disposable posts, Instagram for photos), you pretty much choose a tool based on how many of your contacts you can reach. Economists would call messaging a one-sided market (a market that derives most of its value from a single class of users), and the network effects derived from users attracting more users as being ______-______ exchange benefits (benefits derived by interaction among members of a single class of participant).

cross-side exchange benefit

When an increase in the number of users on one side of the market (console owners, for example) creates a rise in the other side (software developers).

Google, Apple, incentive

_______ and _______ use their mobile operating systems to embed their payment apps in millions of hardware products. Google hopes that its presence on Android and its ad relationship with many retailers will help it jump-start Android Pay-accepting merchant adoption. iTunes and the App Store helped Apple have over 800 million credit cards on file at the launch of Apple Pay for iOS. Firms need a strong __________ for users to download and set up payments. Starbucks built a wildly successful payments app by offering rewards for frequent customer purchases. However, Square's payment app struggled when customers saw little incentive to install an app when cash and credit worked fine and using the app offered no incentive over alternatives.