In Helmer’s Network Economies mechanism, a larger installed base raises customer value and makes overcoming a challenger’s value deficit economically unattractive.

Evidence 3 passages

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  the central feature of network economies. Their founders were fully aware of this business characteristic and aggressively and competently pushed tactics fully consistent with this understanding. Facebook and LinkedIn could coexist because their respective networks were walled off from one another. users wanted to keep their personal lives, Facebook, separate from their work lives, LinkedIn. BranchOut hoped to build a bridge between the two, but it just didn't fly. Users wanted this wall maintained, a lesson Facebook themselves learned in their failed rollout of Facebook at Work. intensity, and some great businesses are built on them. IBM mainframes, operating systems for Microsoft, Steinway pianos, and exchange-traded funds. The Benefit and the Barrier Network economies occur when the value of a product to a customer is increased by the use of the product by others. Returning to our benefit-slash-barrier characterization of power, Benefit A company in a leadership position with network economies can charge higher prices than its competitors because of the higher value as a result of more users. For example, the value of LinkedIn's HR Solution Suite comes from the numbers of LinkedIn users. So LinkedIn can charge more than a competing product with fewer participants.

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  Barrier The barrier for network economies is the unattractive cost-slash-benefit of gaining share. And this can be extremely high. In particular, the value deficit of a follower can be so large that the price discount needed to offset this is unthinkable. For example, what would BranchOut have had to offer users for them to use BranchOut rather than LinkedIn? I think most observers would agree that every user would have required a non-trivial payment, so the total spend for BranchOut would have been colossal. Industries exhibiting network economies often exhibit these attributes. Winner-take-all Businesses with strong network economies are frequently characterized by a tipping point. Once a single firm achieves a certain degree of leadership, then the other firms just throw in the towel. Game over, the P&L of a challenge would just be too ugly. For example, even a company as competent and with as deep pockets as Google could not unseat Facebook with Google+. Boundedness As powerful as this barrier is, it is bounded by the character of the network,

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  something well demonstrated by the continued success of both Facebook and LinkedIn. Facebook has powerful network economies itself, but these have to do with personal, not The boundaries of the network effects determine the boundaries of the business. Decisive early product Due to tipping point dynamics, early relative scaling is critical in developing power. Who scales the fastest, is often determined by who gets the product most right early on. Facebook's trumping of MySpace is a good example. This benefit-slash-barrier combination allows me to place network economies on the seven powers chart. See figure 2.2 of the supplementary PDF. Network Economies Definition A business in which the value realized by a customer increases as the installed base increases. Network Economies Industry Economics and Competitive Position Power ensures the ability to earn outsized returns well into the future, driving up value. This is captured by the benefit-slash-barrier requirement. As before in chapter 1, I will use surplus leader margin to calibrate the intensity of power. What governs the leader's profitability when prices are such that the challenger makes no profit at all? In the case of network economies, I assume all costs are variable, see?

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