I recently read a MIT’s Sloan Review published article by Tellis, Yin and Niraj. The article discusses the “network effect” versus quality in determining which high-tech products win the largest market share. Certainly an interesting article with the reassuring message: the product with the best quality, and not market dominance, will eventually prevail. It just seems fair.
But what is the ‘network effect’?
The term refers to the situation, where a current market dominant product due to early market entry provides access to a larger number of features, services and accessories; as well as possessing the greater brand awareness. The combination creates a situation, where other companies consistently prefers to develop their services and products for our ‘preferred’ product. Examples include Apple’s iOS (mobile), Microsoft Windows (desktop computing), or Facebook (social media).
The network effect plays in favour of the current market dominant player preventing new players to take the leading position, but as Tellis et al. found, this “favouritism” is temporarily unless the leading product can maintain superior quality.
However, there is one aspect which the researchers did not consider: the situation where the network influences the perception of a product’s quality. That is when your perception of your purchased product is dependent on who else in your social network uses that product.
For example, people who choose word processing software (unfortunately) have to consider, what other people use. Sharing MS Word documents with other word processing applications remain, at best, a trying experience. If two out of three people sharing documents use MS Word, then my bet is that the third user will soon give up and ‘convert’ to MS Word – simply because the ‘quality’ of the non-MS Word application’s ability to work with MS Word documents is considerably less than MS Word (surprise, surprise).
We see the same effect for Facebook. Facebook is the number 1 social network, not because it is the best offering, but because everyone else uses it.
Apple was able to launch a quality product such as the iPhone, because making a phone call between an iPhone and a Nokia phone was no different than making a call between two Nokia phones. The user’s perception of the product was not directly impacted by the network effect.
Not so in the case of word processing software or social networks, where the cross product compatibility (or complete lack off in the case of social networks) plays in favour of the dominant player. MS Word has been the market leader for at least a decade, maybe longer, whereas Tellis et al. found an average of 3.8 years for market leaders.
G.J. Tellis, E. Yin and R. Niraj, “Does Quality Win? Network Effects Versus Quality in High-Tech Markets,” Journal of Marketing Research 46, no. 2 (April 2009): 135-149.