When Network Externalities Fail Make Glue


Tim J. Smith, PhD
Founder and CEO, Wiglaf Pricing

Published February 28, 2002

Network Externalities has been the mantra among Hi-Tech new ventures. They provide a believable logic behind their revenue forecasts that predict exponential growth and permanent 90% market-share in an untapped market. Yet sometimes this fairy-tale just ain’t so.

What are network externalities? They are reasons that induce the market to accept a solution as a standard. One way of thinking about it is from the end-user viewpoint. Users gain value from new products both due to their intrinsic qualities and the network externalities. Intrinsic qualities might be the fact that Nokia and Motorola both make a quality and hip cell phone that is smaller than many key-chains. Network externalities are in the fact that I can send a MS Word document to just about anyone and they can read it only because we have all joined the MS office community of users.

Yet not all markets where one would expect users to adopt a standard coalesce. When this is the case, innovative firms make glue.

BEA has proven the glue model works for business. Early in the business application industry, we were reading articles that might lead us to believe that someday PeopleSoft, BAAN, or SAP would dominate the corporate computing facility just as Microsoft was dominating the PC community. Unfortunately for SAP investors, this didn’t come true. Instead, users selected a plethora of strategic business applications and moved from custom interfaces, to object wrappers, to middleware to tie their information together and enable value creation by decision makers. Now, BEA’s industry accepted Tuxedo middleware product has proven to be a robust solution to tying business applications together.

Mobile computing has a similar problem but this time in a consumer market. In the PDA world alone, we have the high state of competition between Palm OS and Windows CE augmented by some proprietary solutions that have entered the periphery of the market. On top of this, we have RIM devices like Blackberry’s portable email solution, then Cell Phones each with a unique take on WML or some other web browser solution. Moreover, consumers haven t found enough reasons to accept a single solution. Some can just afford a pager, others require a cell phone, utility field service workers need a PDA for meter reading, then comes the stand-alone PDA, and a host of other mobile devices that enable people to access and manage information anywhere, anytime. In the mobile computing market, there simply have not been enough reasons to force the market to coalesce around a single platform solution. Furthermore, since Swiss army knifes aren’t for everyone, we also should expect the crossover product by Kyocera and Handspring to be the end of the mobile computing evolution. Rather, we might need to acknowledge that the network externalities have been too weak to overcome the value offered by the intrinsic qualities of the various unique solutions in the mobile computing market.

Fortunately, when network externalities fail to drive the market toward a single standard, some innovative firm will make a compelling glue that tie the various standards together. Enter Curios Networks. Curios Networks solution, presented on Tuesday at the Midwest Wireless Application Developers SIG, was founded on the belief that firms will need glue to tie mobile computing platforms together in making consumer wireless applications a reality. In this technology world, they have probably found a space for success.

The May Report, TECH BUSINESS BRIEFS, February 28, 2002

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About The Author

Tim J. Smith, PhD, is the founder and CEO of Wiglaf Pricing, an Adjunct Professor of Marketing and Economics at DePaul University, and the author of Pricing Done Right (Wiley 2016) and Pricing Strategy (Cengage 2012). At Wiglaf Pricing, Tim leads client engagements. Smith’s popular business book, Pricing Done Right: The Pricing Framework Proven Successful by the World’s Most Profitable Companies, was noted by Dennis Stone, CEO of Overhead Door Corp, as "Essential reading… While many books cover the concepts of pricing, Pricing Done Right goes the additional step of applying the concepts in the real world." Tim’s textbook, Pricing Strategy: Setting Price Levels, Managing Price Discounts, & Establishing Price Structures, has been described by independent reviewers as “the most comprehensive pricing strategy book” on the market. As well as serving as the Academic Advisor to the Professional Pricing Society’s Certified Pricing Professional program, Tim is a member of the American Marketing Association and American Physical Society. He holds a BS in Physics and Chemistry from Southern Methodist University, a BA in Mathematics from Southern Methodist University, a PhD in Physical Chemistry from the University of Chicago, and an MBA with high honors in Strategy and Marketing from the University of Chicago GSB.