Spotlight Question 5

1. The Apple iOS developer program provides developers access to the App Store where they can distribute their free or commercial applications to millions of iPad, iPhone and IPod Touch customers. Would the iPhone market be considered a one-sided or two-sided market?

The Apple market would be considered a two-sided market.

2. Which firm do you suspect has stronger end-user network effects: Googles online search tool or Microsofts Windows operating system? Why?

The Microsoft Windows operating system would have a stronger end-user network effect. This is because of the higher switching costs.

4. How do Apple and Microsoft encourage the development of complementary products?

They both allow allow developers to sell their products online through XBOX marketplace and iTunes, respectively.

4. What tactic might an established firm employ to make it impossible, or at least difficult, for a competitor to gain access to, or become compatible with their product or service?

They can use pronouncements to keep customers waiting. They can also develop software that uses other softwares but is non-copyable like Apple.

1. What is the difference between a one-sided market and a two-sided market? Give examples of each.

A one-sided market is one that derives most of its value from a single class of users. Messaging is an example of a one-sided market. A two-sided market however, network markets comprised of two distinct categories of participant. It is needed to deliver value for the network to work. Apple Pay is an example of a two-sided market.

2. What sorts of complimentary benefits are available for these products? Are complementary benefits strong or weak?

Apple offers complementary service updates, software updates, and other 'benefits' that are very cheap for Apple but make their products and services appear very high-quality to potential consumers. These complementary benefits are weak from the perspective of the consumer, meaning that they are not the primary reason that people originally purchase Apple products, but are strong, in the sense that they help preserve consumers, keeping them coming back to Apple

3. What is the relationship between network effects "ecosystem"?

As network effects increase, a single company tends to become the leader and they have almost all the bargaining power. Their bargaining power increases over their customers because as they become less likely to switch, you can charge them more.

2. Identify firms that you believe have built a strong platform. Can you think of firms that have tried to develop a platform, but have been less successful? Why do you suppose they have struggled?

I believe that firms such as Apple and Google have built strong platforms. A platform that I think has tried to build a strong platform and failed is the app Yik Yak. While they had a lot of users at first, they failed to keep users throughout the apps lifetime. I believe they also struggled because it caused a lot of problems with cyberbullying, which in turn led to its platform being banned.

1. Identify examples of two-sided markets where both sides pay for a product or service. Identify examples where only one side pays. What factors determine who should pay? Does paying have implications for the establishment and growth of a network effect? What might a firm do to encourage early network growth?

I believe video games could be looked at as a two-sided market where both sides pay. While the consumers buy the game, the coders that make the game are also hired to develop new games. For where one side pays, I think that instant messaging is a good example. The factors that determine who should pay are demand and supply, novelty, market conditions, economic and political conditions of both the buyer and seller. Network effects might limit the number of rivals that challenge a dominant firm. But the establishment of a dominant standard may actually encourage innovation within the standard, since firms producing complements for the leader have faith the leader will have staying power in the market. If firms expand their user base, they could encourage early network growth.

4. Think about the kinds of technology projects you own. What sorts of switching costs are inherent in each of these? Are these strong switching costs or weak switching costs? What would it take for you to leave one of these services and use a rival? How might a competitor try to lessen switching costs to persuade you to adopt their product?

I own a MAC laptop along with multiple Apple products. I believe that there would be a few switching costs for me to switch to a different laptop brand. If I were to switch to another brand of computer, I would not be able to use my other Apple products with my computer. Such as being able to get messages through my computer, using my apple air-pods, and being able to back up all of my photos and videos straight to my iCloud. These are pretty strong switching costs to me. On the other hand, HP offers features such as touchscreen and they have also updated their computers to be compatible with more Apple products than before. If HP were able to adopt a more universal expectance of major phone brands, I think I would think more about the switch from Apple to HP.

3. Are network effects good or bad for innovation? Explain.

Network effects can be good and bad for innovation. It is bad because even if you come up with a great idea, it will deter due to the costs and risks companies will incur in trying to come up with new products against the dominant standard. Although it is bad, it can also be good because while network effects limit competition against the dominant standard, it encourages innovators to blossom within a standard.

2. How is competition in markets where network effects are present different from competition in traditional markets?

Network markets experience early fierce competition. Firms are aggressive in the early stages because once a leader becomes clear, new adopters begin to favor the leading product over others.

3. What are the reasons it is so difficult for late-moving, incompatible rivals to compete in markets where a dominant, proprietary standard is present? How is technological leapfrogging related to this problem?

Newcomers will find their technology will need to be so good that it must leapfrog not only the value of the established firms tech, but also the perceived stability of the dominant firm, the exchange benefits provided by the existing user base, and the benefits from any product complements. You can see this with rivals trying to unseat the dominance of Windows.

1. What is the difference between same-side exchange benefits and cross-side exchange benefits?

Same-side exchange benefits are derived by interaction among members of a single class of participant. Cross-side benefits shows an increase in the number of users on one side of the market, creating a rise on the other side.

3. Is it ever advantageous for firms to give up control of a network and share it with others? Why or why not? Give examples to back up your point.

Sometimes firms decide from the start to band together to create a new, more open standard, realizing that collective support is more likely to jumpstart a network than if one firm tried to act with a closed, proprietary offering. Examples of this include the coalitions of firms that have worked together to advance standards like Bluetooth and Wi-Fi. While no single member firm gains a direct profit from the sale of devices using these standards, the standard's backers benefit when the market for devices expands as products become more useful because they are more interoperable.

4. What does backward compatibility mean and why is this important? What happens if a firm is not backward compatible?

The ability to take advantage of complementary products developed for a prior generation of technology. If a firm is not backward compatible, they reenter a market at installed base-zero and give up a major source of advantage.

4. How has Apple kept clones at bay?

While Macs run Windows, Windows computers can't run Mac programs. Apple has embedded key software in Mac hardware. And if any firm gets close to cloning Mac hardware, Apple sues. The firm also modifies software on other products like the iPhone and iTunes each time wily hackers tap into closed aspects of its systems.

2. Think about the kinds of technology products that you own that are subject to network effects. What sorts of exchange do these products leverage (e.g. information, money, software, or other media)?

With Facebook, people exchange information, share pictures, and share what they want on statuses. Facebook only works because there are so many people using the social media platform.

3. Is market entry timing important for network effects markets? Explain and offer an example to back up your point.

Yes. Being early allows your firm to start the network effects snowball rolling in your direction. Yahoo beating out Ebay in Japan is a good example of why timing is important for network effects markets. Ebay lost billions in sales because they were just five months late.