CHAPTER 7 UNDERSTANDING NETWORK EFFECTS

Introduction * Network effects: When the value of a product or service increases as its number of users expands * Also known as network externalities or Metcalfe’s Law * When network effects are present: * The value of a product or service increases as the number of users grows * They’re among the most important reasons you’ll pick one product or service over another

Where’s all that Value Come From? * The value derived from network effects comes from three sources: * Exchange * Exchange creates value and every product or service subject to network effects fosters some kind of exchange * Staying power: The long-term viability of a product or service * Networks with greater numbers of users suggest a stronger staying power * Complementary benefits: Products or services that add additional value to the network * The three value-adding sources work together to reinforce one another in a way that makes the network effect even stronger * When users exchanging information attract more users, they can also attract firms offering complementary products * When developers of complementary products invest time writing software switching costs are created that enhance the staying power of a given network

One-Sided or Two-Sided Markets?
One-sided markets * A market that derives most of its value from a single class of users * Have same-side exchange benefits * Benefits derived by interaction among members of a single class of participant
Two-sided markets * Network markets comprised of two distinct categories of participant, both of which that are needed to deliver value for the network to work * Have cross-side exchange benefits * When an increase in the number of users on one side of the market creates a rise in the other side
How Are These Markets Different? * Network markets experience early, fierce competition * Firms are very aggressive in the early stages of these industries because: * Once a leader becomes clear, bandwagons form * New adopters begin to overwhelmingly favor the leading product over rivals, tipping the market in favor of one dominant firm or standard * These markets are often winner-take-all or winner-take-most, exhibiting monopolistic tendencies where one firm dominates all rivals * If a few strong players emerge they could even become an oligopoly * The best product or service doesn’t always win * Winning customers away from a dominant player in a network industry isn’t as easy as offering a product or service that is better * Any product that is incompatible with the dominant network has to exceed the value of the technical features of the leading player, plus the value of the incumbent’s exchange, switching cost, and complementary product benefit * The incumbent must not be able to easily copy any of the newcomer’s valuable new innovations * Technological leapfrogging can be really tough * Technological leap-frogging 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

Figure 6.1- Battling a Leader with Network Effects is Tough

Strategies for Competing in Markets with Network Effects

* Move early * Subsidize product adoption * Leverage viral promotion * Expand by redefining the market to bring in new categories of users or through convergence * Form alliances and partnerships * Establish distribution channels * Seed the market with complements * Encourage the development of complementary goods * Maintain backward compatibility * For rivals, be compatible with larger networks * For incumbents, constantly innovate to create a moving target and block rival efforts to access your network * For large firms with well-known followers, make preannouncements

CHAPTER 8:
SOCIAL MEDIA, PEER PRODUCTION, AND WEB 2.0

Introduction

* Web 2.0 * Internet services that foster collaboration and information sharing; characteristics that distinctly set “Web 2.0” efforts apart from the static, transaction-oriented Web sites of “Web 1.0” * Often applied to Web sites and Internet services that foster social media or other sorts of peer production

Table 7.1 - Web 1.0 versus Web 2.0

* Web 2.0’s most powerful feature * Peer production: When users collaboratively work to create content, products, and services * Peer-produced services have the ability to save their sponsors the substantial cost of servers, storage, and bandwidth * Peer production is leveraged to create much of the open source software that supports many of the Web 2.0 efforts * Crowdsourcing, where initially undefined groups of users band together to solve problems, create code, and develop services, is a type of peer production * Web-based efforts that foster peer production: Social media or user-generated content sites * Social media: Content that is created, shared, and commented on by a broader community of users * Services that support the production and sharing of social media include blogs, wikis, video sites like YouTube, and most social networks

Blogs * Blogs are online journal entries, usually made in a reverse chronological order * Blogs provide comment mechanisms where users can post feedback for authors and other readers * Trackbacks: Links in a blog post that refer readers back to cited sources * It allows a blogger to see which and how many other bloggers are referring to their content * Blog roll: A list of a blogger’s favorite blogs * Not all blogs include blog rolls * Blogs can be hosted via third-party services with most offering a combination of free and premium features * Blogging software can be run on third-party servers, allowing the developer more control in areas such as security and formatting * The value of any particular blog derives from a combination of technical and social features
Wikis
* A Web site that can be modified by anyone, from directly within a Web browser, provided that user is granted edit access * Largest and most popular wiki: Wikipedia * The value of a wiki derives from both technical and social features * Wikis serve as knowledge management systems * It acts as a collective corporate memory that’s vital for sharing skills, learning, and preserving expertise even when employees leave the firm

* Wikis support what you see is what you get (WYSIWYG) editing * What you see is what you get (WYSIWYG): A phrase used to describe graphical editing tools, such as those found in a wiki, page layout program, or other design tool * Roll back: The ability to revert a wiki page to a prior version. This is useful for restoring earlier work in the event of a posting error, inaccuracy, or vandalism

* Most wikis support the following key features: * All changes are attributed, so others can see who made a given edit * A complete revision history is maintained so changes can be compared against prior versions and rolled back as needed * There is automatic notification and monitoring of updates * All the pages in a wiki are searchable * Specific wiki pages can be classified under an organized tagging scheme * Wikis are available as * Software - Firms can install on their own computers * Online services - Content is hosted off site by third parties * Since wikis can be started without the oversight or involvement of a firm’s IT department, their appearance in organizations comes from grassroots user initiative * Wikis can be vital tools for * Collecting and leveraging knowledge that would otherwise be scattered throughout an organization * Reducing geographic distance * Removing boundaries between functional areas * Flattening preexisting hierarchies * When brought outside the firewall, corporate wikis can be a value-generation greenhouse, allowing organizations to leverage input from their customers and partners * Jump-starting a wiki can be a challenge, and an underused wiki can be a ghost town of orphan, out-of-date, and inaccurate content * Some organizations employ wikimasters to: * Garden community content * Prune excessive posts * Transplant commentary to the best location * Weed as necessary

Social Networks * It is an online community that allows users to establish a personal profile and communicate with others * The two most dominant public social networks are Facebook and LinkedIn * The most powerful feature of most social networks is the feed * Feed: An update on an individual’s activities that are broadcast to a member’s contacts or friends * Feeds are inherently viral * Viral: Information or applications that spread rapidly between users

* Features of a social network include support for the following: * Detailed personal profiles * Affiliations with groups and with individuals and with products, firms, and other organizations * Private messaging and public discussions * Media sharing * Discovery-fueling feeds of recent activity among members * The ability to install and use third-party applications tailored to the service

Corporate Use of Social Networks * Social networks have become organizational productivity tools * At the most basic level, corporate social networks have supplanted the traditional employee directory * Important since a large percentage of employees regularly work from home or client locations * Firms are setting up social networks for customer engagement and mining these sites for customer ideas, innovation, and feedback

Twitter and Rise of Microblogging * Twitter is a microblogging service that allows users to post 140 character messages (tweets) via the Web, SMS, or a variety of third-party desktop and smartphone applications * Microblogging: A type of short-message blogging, often made via mobile device * Twitter’s default setting allows for asymmetrical following, unlike Facebook * Twitter has served as an early warning mechanism in disasters, terror, and other events

* Twitter hash tags are used to organize “tweets” on a given topic * Firms leverage Twitter in a variety of ways: * Promotion * Customer response * Gathering feedback * Time-sensitive communication * Organizations are advised to monitor Twitter activity related to the firm * Despite its rapid growth and impact, significant questions remain regarding: * The firm’s durability * Revenue prospects * Enduring appeal to initial users * Many Twitter users rarely visit the site * This happens because Twitter made its data available for free to other developers via API (application programming interface) * Application programming interfaces (APIs): Programming hooks, or guidelines published by firms that tell other programs how to get a service to perform a task such as send or receive data * If users don’t visit Twitter.com, that lessens the impact of any ads running on the site, this creates free rider problem * Free rider problem: When others take advantage of a user or service without providing any sort of reciprocal benefit

Other Key Web 2.0 Terms and Concepts * RSS (“really simple syndication” and “rich site summary”): A method for sending/broadcasting data to users who subscribe to a service’s “RSS feed” * Many firms use RSS feeds as a way to manage information overload * Folksonomies: Keyword-based classification systems created by user communities as they generate and review content * Mash-ups: Combinations of two or more technologies or data feeds into a single, integrated tool * XML: Tagging systems that make mash-ups easy * Location-based services: Services that incorporate GPS, cell phone triangulation, or wi-fi hotspot mapping to identify a user’s whereabouts and integrate this into their online experience * Augmented-reality: Apps that can overlay real data on top of images from a GPS * Virtual worlds: A computer-generated environment where users present themselves in the form of an avatar, or animated character * YouTube, podcasting, and rich media * Podcasts: Digital audio files provided as a series of programs * Rich media: Content that is more complex than simple text or photos

Prediction Markets and the Wisdom of Crowds\ * Wisdom of crowds: The idea that a group of individuals (the crowd), often consisting of untrained amateurs, will collectively have more insight than a single or small group of trained professionals * Prediction market: Polling a diverse crowd and aggregating opinions in order to form a forecast of an eventual outcome

* Criteria necessary for a crowd to be smart: * Diverse * Decentralized * Offer a collective verdict * Independent

Crowdsourcing * It is the act of taking a job traditionally performed by a designated agent and outsourcing it to an undefined generally large group of people in the form of an open call * Firms that have used crowdsourcing successfully: * InnoCentive for scientific R&D * TopCoder for programming tasks * Amazon’s Mechanical Turk for general work

Get SMART – The Social Media Awareness and Response Team * Get SMART: Creating a social media awareness and response team * Social media is an interdisciplinary practice, and the team should include professionals experienced in: * Technology * Marketing * PR * Customer service * Legal * Human resources * Social media policies revolve around three Rs * Representation * Responsibility * Respect * Security training is a vital component of establishing social media policy * While it is tempting to create ‘sock puppets’ to ‘astroturf’ social media with praise posts, the practice violates FTC rules and can result in prosecution * Online reputation management: The process of tracking and responding to online mentions of a product, organization, or individual * Many tools exist for monitoring social media mentions of an organization, brands, competitors, and executives * Social media are easy to adopt and potentially easy to abuse * The embassy approach to social media has firms establish their online presence at various services with a consistent name * Social media provides “Four Ms” of engagement * Megaphone to send out messages from the firm * Magnet to attract inbound communication * Monitoring and mediation – Paying attention to what’s happening online and selectively engage conversations when appropriate * Engagement can be public or private