Deck 8: Understanding Network Effects: Strategies for Competing in a Platform-Centric, Winner-Take-All World

Question 1

What are "network effects"? Define the term and briefly explain the relevance they hold in an economic context.

Answer 1

Network effects are sometimes referred to as "Metcalfe's Law" or "network externalities." In this context, a network refers to a common user base that is able to communicate and share with one another. When network effects are present, the value of a product or service increases as the number of users grows. Network effects are the most important reasons why users pick one product or service over another. They are among the most powerful strategic resources that can be created by technology-based innovation. Many category-dominating organizations and technologies owe their success to network effects, including Microsoft, Apple, NASDAQ, eBay, Facebook, and Visa. Network effects are also behind the establishment of most standards, including Blu-ray DVD, Wi-fi, and Bluetooth.

Question 2

Metcalfe's Law is also known as:

A) systemic events.
B) cluster effects.
C) group impressions.
D) herd instincts.
E) network externalities.

Answer 2

E

Question 3

Staying power refers to the:

A) relative abilities of parties in a situation to exert influence over each other.
B) energy demands required to run a product or service.
C) ability of a firm to produce a good or service at a lower opportunity cost than a rival.
D) long-term viability of a product or service.
E) ability to take advantage of complementary products developed for a prior generation of technology.

Answer 3

D

Question 4

Which of the following products or services is not subject to network effects?

A) Banking services
B) Snack chip manufacturing
C) Video game consoles
D) Social networks
E) Cell phone services

Question 5

Which of the following terms is used as an alternative to switching costs?

A) Lock-in
B) Complementary benefits
C) Exchange benefits
D) Straddling costs
E) Network impedance

Question 6

Many firms attempt to enhance their network effects by creating a platform for the development of third-party products and services that enhance the primary offering.

Question 7

Windows OS, the iPhone, the Wii, and Facebook's application programming interfaces allow for the development and integration of complementary goods by third parties. Based on this evidence, all these products or services are said to be _____.

A) pure plays
B) coopetitors
C) adaptors
D) platforms
E) venture capitalists

Question 8

In the absence of network effects, the value of a product or service increases as the number of users grows.

Question 9

What are the primary sources of value for network effects? Give a brief description of how each of these factors provides value for network effects.

Question 10

_____ are products and services that allow for the development and integration of complementary goods.

Question 11

High switching costs serve to weaken the value of network effects as a value asset.

Question 12

The higher the value of a user's overall investment, the more they are likely to consider the staying power of any offering before choosing to adopt it.

Question 13

Staying power is important for consumers of technology products because investment over time usually greatly exceeds the initial price paid for a product or service

Question 14

Network effects do not influence all consumer products or services.

Question 15

Which of the following factors represents one of the sources of value derived from network effects?

A) Congestion
B) Price transparency
C) Information symmetry
D) Staying power
E) Complementary costs

Question 16

A firm can spend no money and time, yet expect to enhance its offerings, by:

A) allowing other firms to contribute to its platform.
B) going public through an initial public stock offering.
C) outsourcing critical processes to third parties.
D) adopting an envelopment strategy.
E) preannouncing a forthcoming product to lower sales of current offerings.

Question 17

Network effects are also known as _____ Law or Network ____________.

Question 18

_____ are products or services that add additional value to the primary product or service that makes up a network.

A) Quantum efforts
B) Substitute components
C) Complementary benefits
D) Orthogonal gains
E) Standby additions

Question 19

In the context of network effects, the term "network" refers to either wired or wireless systems that connect computing components.

Question 20

Every product or service subject to network effects fosters some kind of exchange.

Question 21

Cross-side benefits arise due to interaction among members of a single class of participant.

Question 22

An instant-messaging standard is an example of a one-sided market.

Question 23

One way firms seek to strengthen their platforms and encourage third parties to develop complementary goods is by offering ___________.

Question 24

The video game console market offers important lessons for the strategist. The video game console market is a network market in which Sony's PlayStation 2 (PS2) dominated over Microsoft's Xbox offering. This has been possible due to:

A) the low pricing of Xbox which eroded users' confidence in the product.
B) game developers favoring PS2 for its larger user base obtained because the PS2 was launched months before the Xbox.
C) the presence of several cheap, rival imitations which ate into Xbox's market share.
D) PS2's technical superiority over the Xbox.
E) the straddling strategy adopted by Microsoft to expand in both video game and DVD player markets.

Question 25

Almost all networks derive most of their value from a single class of users.

Question 26

The natural state of a market where network effects are present is for there to be intense competition between several rivals that come to an equalibrium where their respective market shares are roughly identical.

Question 27

Mobile software developers often find iOS more attractive than the Android operating system, because Android runs on many more types devices than iOS and the Android operating system is fragmented into differnet versions, each combination of which needs to be tested.

Question 28

Explain the nature of competition in markets influenced heavily by network effects.

Question 29

Apple, which controls over 75 percent of digital music sales, was able to dictate song pricing for years, despite the tremendous protests of the record labels. This implies that:

A) despite the presence of network effects, the music industry is not dominated by any single leader.
B) the presence of multiple new entrants forces leading firms to drop prices of their offerings.
C) firms with strong market dominance can enjoy substantial bargaining power over partners.
D) a dominant market share does not necessarily translate to greater profitability for a firm.
E) there were cross-side network effects between the various music labels.

Question 30

A market dominated by a small number of powerful sellers is known as a(n) _____ .

A) oligopoly
B) pure play
C) short tail
D) blue ocean
E) greenfield

Question 31

Which statement best describes the relationship between network effects and innovation?

A) Network effects decrease innovation within a standard but increase the number of innovative offerings that compete against a strongly established standard.
B) Network effects increase innovation within a standard but decrease the number of innovative offerings that compete against a strongly established standard.
C) More often than not, network effects foster innovation
D) More often than not, network effects limit innovation

Question 32

Distinguish between one-sided and two-sided markets. Provide examples for each and mention the benefits derived from these markets.

Question 33

___________ allows Apple to use iOS as a platform for exercise and personal health measurement.

Question 34

Sure, network effects are valuable, but why? List the three sources of the value (cited in our textbook & in class) that fuel the competitive advantage of network effects.

Question 35

Are the markets for mobile payments one-sided or two-sided? Describe why you chose your answer.

Question 36

___________ allows iOS to control home products including locks, lighting, and thermostats.

Question 37

In a market influenced by network effects, the winning product or service is often determined by its technical superiority, with technically strong newcommers able to unseat the dominant incumbents.

Question 38

Markets where strong network effects are present often exhibit a winner-take-all or winner-take-most dynamic. What network effects-related advantages can a dominant incumbent enjoy that help it repell rivals, and why is it so difficult for a newcommer to displace the dominant player in these markets?

Question 39

A market is said to be _____ if it derives most of its value from a single class of users.

A) a pure play
B) a long tail
C) core competent
D) one-sided
E) convergent

Question 40

A market where there are many buyers but only one dominant seller is known as a(n) _____.

Question 41

Uber and PayPal used similar strategies when trying to jumpstart network effects that were vital in creating their dominance. What did each do?

Question 42

Firms that constantly innovate do so to develop open standards for competitors to become compatible.

Question 43

Social proof is defined as the negative influence created when someone finds out that others are doing something.

Question 44

Regional anti-trust authorities may consider product bundling by dominant firms to be anticompetitive.

Question 45

Adobe gives away the Acrobat Reader to build a market for the sale of software that creates Acrobat files. This is an example of:

A) one market attempting to conquer a new market by making it a subset, component, or feature of its primary offering.
B) firms giving away products for half of a two-sided market to seed the market.
C) markets, once considered distinctly separate, beginning to offer similar features and capabilities.
D) firms taking advantage of complementary products developed for a prior generation of technology.
E) firms spreading costs across increasing units of production or in serving multiple customers.

Question 46

A Blue Ocean strategy often works best when combined with operational effectiveness.

Question 47

Startup firms that find new markets attractive but do not yet have products ready for delivery preannounce efforts causing potential adaptors to delay a purchasing decision until the new effort rolls out.

Question 48

Two distinctly separate markets are said to undergo convergence when they:

A) are dominated by a small group of powerful sellers.
B) derive most of their value from two distinct categories of participants.
C) offer products and services designed to target a specific industry.
D) are characterized by many buyers, but a single, dominant seller.
E) begin to offer similar features and capabilities.

Question 49

_____ is said to occur when one market attempts to conquer a new market by making it a subset, component, or feature of its primary offering.

A) Acquisition
B) Greenfield investment
C) Envelopment
D) Market leapfrogging
E) Monopolization

Question 50

You are at a packed stadium for the big game and you want to upload a photo of your team's touchdown using Instagram. Your mobile phone shows five bars of service, but you still can't access the Internet. This is likely an example of ______.

Question 51

Moving first plays a significant role in markets influenced by network effects.

Question 52

Nokia is a cell phone brand that offers digital cameras as part of its cell phone products. It is now in direct competition with camera brands such as Canon and Sony, and has become the world's largest seller of cameras. This is an example of:

A) envelopment.
B) product customization.
C) market diversity.
D) product development.
E) market innovation.

Question 53

_____ involves competing by offering a new technology that is so superior to existing offerings that the value overcomes the total resistance that older technologies might enjoy via exchange, switching cost, and complementary benefits.

Question 54

While Sony and Microsoft focused on the graphics and raw processing power favored by hard-core male gamers, Nintendo chose to develop a machine to appeal to families, women, and age groups that normally shunned violent games. The strategy adopted by Nintendo in this example is the _____ strategy.

A) straddling
B) customer engagement
C) Blue Ocean
D) mass customization
E) convergence

Question 55

Envelopment is a management strategy where a dominant firm acquires all the layers in its value chain to increase profitability.

Question 56

Cisco purchased Pure Digital, maker of the Flip video recorder, but ended up shutting the unit down a little over two years later. The reason for Cisco's failure was:

A) Envelopment. Smartphone manufacturers and music players began to offer video recording features, enveloping the benefit provided by Pure's gear in their offerings.
B) Network effects. Late-arriving Cisco could not compete against the dominance of existing, incompatible standards created by early-moving incumbents.
C) The Osbour Effect. Cisco preannounced a product and no one wanted its current offerings.
D) Staying power. Consumers weren't convinced a small firm like Cisco could win in the market.

Question 57

Viral promotion involves:

A) offering rebates and incentives to customers for adopting a product or service.
B) paying celebrities to use a product visibly to lure customers into unwittingly buying the product.
C) emphasizing customer retention and satisfaction, rather than a dominant focus on sales transactions.
D) leveraging a firm's customers to promote a product or service.
E) sending a pre-written set of messages to customers or prospects over time.

Question 58

Which of the following is an example of a measure taken by a firm to encourage the development of complementary goods?

A) Adobe giving away the Acrobat Reader for free
B) Microsoft bundling new products into Windows, Internet Explorer browser, and other offerings
C) The Twitter Fail Whale
D) Apple offering a regular conference and online materials for its software developers, and an online app store where they can sell their products.
E) Nintendo's Wii games targeted at families, women, and older age groups

Question 59

Congestion effects often result when a key resource becomes increasingly scarce with the arrivals of more and more users.

Question 60

Worldwide auction leader eBay started operations in Japan just five months after Yahoo! launched its Japanese auction service. But eBay was never able to mount a credible threat and ended up pulling out of the market. This example shows that:

A) online auction markets are characterized by constant shifts in market dominance.
B) market dominance in the global marketplace translates to an equivalent position in national markets.
C) national markets tend to be influenced by factors that are not necessarily localized.
D) it's imperative to move first in markets influenced by network effects.
E) firms should always subsidize initial adoption of their products and make them cheaper than their competitor's products.

Question 61

The phrase ________________ refers to positive influence created when someone finds out that others are doing something.

Question 62

If a firm's claim in the blue ocean is based on easily _____ resources (like technology features), then holding off rivals will be tougher.

Question 63

Microsoft's Live Maps and Virtual Earth 3D was a late entrant to the Internet mapping game. Users had already put in countless hours building resources that meshed with Google Maps and Google Earth. However, by adopting the same keyhole markup language (KML) standard used by Google, any work done by users for Google in KML could be used by Microsoft. What strategy of Microsoft has allowed it to catch up with Google?

A) Making a new market a subset of its main offering
B) Taking advantage of complementary products developed for a prior generation of technology
C) Entering an uncontested, low-profit market instead of competing in saturated, high-profit markets
D) Exchanging technical expertise in one area with another firm to effectively suit resource capabilities
E) Making a new product compatible with the leading standard

Question 64

Large firms often find new markets attractive, but might not have products ready for delivery. What strategy do such firms use to get potential adopters to delay their purchasing decisions?

A) Preannounce forthcoming efforts
B) Make their new products compatible with the leading standard
C) Spread costs across increasing units of production or in serving multiple customers
D) Give away products for half of a two-sided market to seed the market
E) Leverage customers of their other products to promote a new product

Question 65

With the help of examples explain how firms have used the strategies of alliances and partnerships to try to strengthen and develop network effects.

Question 66

The ability to take advantage of complementary products developed for a prior generation of technology is known as _____.

Question 67

The phenomenon of ________________________________________ exists when increasing numbers of users lower the value of a product or service

Question 68

_____ occur(s) when increasing number of users lower the value of a product or service.

A) Network internalities
B) Market inflexibility
C) Congestion effects
D) Backward incompatibility
E) Convergence

Question 69

The rise of social media has made _____ promotion a tool that many firms can exploit.

Question 70

Customers who owned Nintendo's 8-bit video game console were unable to play the same games on the firm's new 16-bit Super Nintendo system. There was little incentive for existing Nintendo fans to stick with the firm. In this case, Nintendo's new offering suffered from a lack of:

A) switching costs.
B) backward compatibility.
C) staying power.
D) effective pricing.
E) network effects.

Question 71

eBay dominated worldwide markets for auctions. Yahoo entered the Japanese online auction market just five months before eBay, yet eBay never matched Yahoo's lead and it eventually pulled out of the Japanese market, ceding a multi-billion dollar market to its rival. Why didn't the network effects-derived value from eBay's other markets help it in Japan?

Question 72

A firm is said to have suffered from the _____ when it preannounces a forthcoming product or service, and experiences a sharp and detrimental drop in sales of current offerings as users wait for the new item.

Question 73

Samsung also leveraged _____to make Samsung Pay accepted at more retailers than either Apple Pay or Android Pay.