The Network Effect
You’ve all heard of Moore’s Law: but there’s a lesser known law called Metcalf ’s Law and that is, “The value of a network equals the square of the number of users.” Take, one phone – it’s useless; two phones are at least useful; a thousand phones is a network; a million phones are suddenly essential. So, is this true for real networks? A network of cell phone users, email users, SMS, Skype, and Facebook, and is it also true of a virtual network? The network of window versus mac users or IOS versus Android users. The more people use a thing, the more valuable it is for each one of us that uses it.
This notion of network effect lends itself to a single dominant player in the marketplace. Think of Facebook. There was a time when you were not on Facebook because it was too small; now it seems to be the time when you have no choice but to be on Facebook because you would never speak to your friends otherwise. That’s the network effect.
It’s true for Skype. It’s true for any application, the more people on it, the more likely you are to be on it. So a single player wins, because that’s what makes sense.
Fixed Cost versus Marginal Cost
The second piece of IT economics is fixed cost versus marginal cost. In any product, there are two sets of costs. There is the cost to develop the product, and the cost to create the one of it that you’re buying, so a normal product like a chair, someone designed it and they were paid, then the company made a lot of chairs, and that development cost was amortised into the per unit cost that, say a hotel, purchased when they bought the chairs.
In IT, pretty much all the cost is in development. The first copy of Microsoft Windows, for example, cost $20 million (I’m making this up), the second copy is free. So, what this means is stealing the results of development is a very powerful attack, this is true for not just software, it’s true for movies, for music, for pharmaceuticals, and this is why you see so much effort going in to protecting the development costs. In other cases, the high fixed cost becomes a barrier to competition. Once Google maps the world, it’s hard for someone else to come in. A company like Google can further cut the costs to zero to prevent further competition coming in…Click HERE to read full article.
