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Strategies & Market Trends : Gorilla and King Portfolio Candidates -- Ignore unavailable to you. Want to Upgrade?

To: Thomas Mercer-Hursh who wrote (38841)	2/2/2001 12:08:35 PM
From: JAPG	Respond to of 54805

Thomas, Agreed, as we progress into the late majority stage of TALC, the conservative group is unitarily more expensive to acquire as a customer, therefore the network rate of growth decelerates. Take care JAPG

To: Thomas Mercer-Hursh who wrote (38841)	2/2/2001 7:58:35 PM
From: Mike Buckley	Read Replies (1) \| Respond to of 54805

Thomas, Network effects occur when one has a network. A star configuration of connections from a vendor to customers has no network effect, only volume. Network effects occur when the connections are many to many, i.e., where each new addition to the network gains not one connection, but connections to all existing members of the network. Then and only then does one have the potential for exponential growth in value from linear growth in the number of nodes. You make a great point that all of us need to keep clear in our minds, but I think that view of network effects is a little too clear-cut, too black and white, when in reality there is a lot of grey area. As an example, the adoption of word processing software is not a network. Yet there are network effects at play when a company evaluating the purchase of word processing software determines that almost all of its suppliers and customers are using a particular word processing product. When deciding to purchase the same product, the company is deciding to join that particular "network;" similarly, to select a different product is a decision not to join that network. Yet no network as you strictly define it exists. The reason understanding network effects is part of understanding Gorilla Gaming is that the "effect" strengthens the value chain and increases the cost of switching. --Mike Buckley

To: Thomas Mercer-Hursh who wrote (38841)	2/4/2001 9:04:35 AM
From: Don Mosher	Read Replies (7) \| Respond to of 54805

Thomas, thanks for your response. As I understand it, you are making two points in support of your contention that "multiple issues are getting muddled here." My best faith effort to summarize your points are: First, There is no network effect involved when certain types of products with high up-front costs and low incremental costs benefit from economies of scale without maintaining a connection with the customer. Second, "Network effects occur when one has a network." The second point is supported by contrasting a star configuration, without network effects, with a network having with many to many connections, which do have such effects. The two issues of "economies of scale" and "what makes a network" are consolidated when you contrast the incremental cost of supplying a new node in a network with the higher cost of a connection in a star configuration. In response, I begin by reiterating my usage of "networks," which includes both physical and virtual networks, and continue by discussing the difference between economies of scale and demand-side scaling. Your statement that "network effects occur when one has a network'' appears to limit networks to physical networks only. Shapiro and Varian (1999, p. 14) believe it is useful to view information technologies in terms of virtual networks because they share many of the properties of physical networks, including network effects. According to S&V (p. 14), "Because these virtual networks of compatible users generate network externalities, popular hardware and software systems enjoy a significant competitive advantage over less popular systems." In my project network report on Wind River, I gave examples of virtual networks of microprocessors ported, VARS, CoEs, 50,000 software engineers using VxWorks/Tornado, multiple lily ponds, and consumers using killer applications. Or, if you return to Everett Rogers classic, Diffusion of Innovation, you can find many examples of cumulative adoption of miracle rice in Bali, of farming innovations in a Columbian village in the Andes, patient Zero and the spread of AIDS through virtual networks, assuming you do not count unprotected anal sex in gay men as a "physical" network (gg). I agree with your point that products with high up-front costs and low incremental costs benefit from high volume sales because the up-front costs can be amortized across a large number of units. Traditional supply-side economies of scale, in which cost is amortized over many units, has been a staple in the industrial economy. However, it has produced an oligopoly of leading firms in a market segment because supply-side economies of scales run into natural limits of bureaucracies: growing size begins to diminish returns. So, General Motors became dominant and large, but could not eliminate Ford and Chrysler. In the new economy, information technologies also benefit from demand-side economies of scale that can create a natural monopoly. Because information is costly to produce but its marginal cost of reproduction approaches zero, it can scale rapidly to meet unlimited demand. Network effects insure that the cost of securing new customers declines, as popularity increases to critical mass because of the sharp, upward inflection in diffusion of information through virtual networks of social channels. Do the distinctions between virtual and physical networks and supply-side and demand-side economies of scale help? If you re-read my sentence with them in mind, does it seem less muddled? To Whom It May Concern: I will not be posting again until April. My wife and I are preparing for our retirement dream vacation, made possible by our profits in Qualcomm. We are going around the world, cruising from Hong Kong to Athens through the Suez.