4 ms·

The phone market, ironically, doesn't have network effects, because any phone can talk to any other phone. But it does have scale and timing effects, because de

by SiVal 12y ago

The phone market, ironically, doesn't have network effects, because any phone can talk to any other phone. But it does have scale and timing effects, because developers decide which platform(s) to develop for, in part, by the number of buyers, and buyers decide which platform to buy based on how well developed, and both accumulate platform inertia over time that defeats any minor advantages of later, alternative platforms. The lack of network effects means that you can get both developers and buyers to adopt a new platform--it's not hopeless--but the scale and timing make it difficult enough that any new phone platform now would need to offer a major advantage, or it shouldn't bother. It would have to be something remarkable. Maybe Amazon, as a major retailer, could have done something along the lines of Apple Pay, but where the phone carrier got a cut of each purchase transaction in exchange for a special, reduced rate plan that made Amazon phone take off as the standard phone for schoolkids. Or Amazon stays close enough to standard Android to make development easy for Android developers but then leverages their AWS to make some sort of deal such as Amazon phone apps get free server-side infrastructure and services on AWS. Or anything ordered through the phone gets Amazon Prime delivery and you can stream Amazon Prime video and music through the phone for free. Whatever, they need to come up with something that offers a remarkable advantage to some market segment or not bother.

MBCook 12y ago
Cell phone certainly have network effects, it's just that they're all software. You're right the carrier doesn't really matter at this point but there's no way I would switch from iOS to Amazon's phone because there just isn't any software available. Even if we ignore the stuff I've already purchased, there are tons of little games and utilities and other fun things that are never going to come out for a fourth tier platform. Even with all the money they have Amazon can't really force people to make software for their phones. Microsoft has tried the "buying developers mindshare" thing for Windows mobile and it hasn't worked well for them. They're still in third place by a giant margin. At this point you can't subsidize yourself into having a first-class software ecosystem. It would just cost way too much. And since Amazon doesn't want to be just another Android vendor, they're not going to let standard Android software run on their phones. At that point they need an insanely compelling feature to get people and "easy Amazon shopping" isn't that. Why should I get a phone for one dollar that has almost no software when I can get an iPhone 5c for free on contract with a ton of software and accessories? I know they're also good Android phones available free on contract.
- SiVal 12y ago
  The network effect I'm talking about is the N-squared growth in value of a network of N nodes where each of the N nodes derives most of its value from the number (N-1) of other nodes. The phone system overall has this property, so does Skype, so does Facebook, but no carrier, handset maker, or OS does, because their users aren't limited to interacting with the other users of the same carrier/handset/OS. Instead, the existing players have a benefit resulting from their size that is more of a scale advantage, in that the N users tend to have access to more things if N is larger, but those "things" are not primarily the N-1 other users. There are more iPhone apps than Android, for example, yet Android sells more units and is growing faster. Scale matters, number of apps matters, but other factors are very significant, too. Apple, therefore, does not have to be the #1 phone maker to make the most money, nor would a new entrant have to have huge scale to have a profitable business. Unlike a network effect business, a new entrant would not have to appeal primarily on the basis of how many other users it already had but, instead, on what value it offered. And you mention that Amazon couldn't get you to switch from iOS because of the number of iOS apps as if the 2 billion phone users out there all care primarily about the number of apps they'll probably never use. Yet Android phones outsell iOS with fewer available apps, and the average Android user buys far fewer apps than the average iPhone user. A significant fraction seem to be satisfied with just the apps that come with the phone and never buy another. It's not unreasonable to assume that there may be many market segments that would be fine with a few thousand apps covering 99%+ of usage PLUS something else they value more highly than the long-tail iPhone apps. Phones and phone plans that specialize in offering something more valuable than Yet More Apps might appeal to many people. Shoppers might care more about Amazon Prime than than the one game app they have to give up if they switch. Parents might care more about a managed kid phone with kid features and a kid rate plan than about Apple's app store. Since the value of phones is not primarily the number of your maker's installed base squared but is based on so many possible things, I think there is room for new entrants as long as they offer something more significant to a market than the extra apps.

by SiVal 12y ago

MBCook 12y ago

Cell phone certainly have network effects, it's just that they're all software. You're right the carrier doesn't really matter at this point but there's no way I would switch from iOS to Amazon's phone because there just isn't any software available. Even if we ignore the stuff I've already purchased, there are tons of little games and utilities and other fun things that are never going to come out for a fourth tier platform. Even with all the money they have Amazon can't really force people to make software for their phones. Microsoft has tried the "buying developers mindshare" thing for Windows mobile and it hasn't worked well for them. They're still in third place by a giant margin. At this point you can't subsidize yourself into having a first-class software ecosystem. It would just cost way too much. And since Amazon doesn't want to be just another Android vendor, they're not going to let standard Android software run on their phones. At that point they need an insanely compelling feature to get people and "easy Amazon shopping" isn't that. Why should I get a phone for one dollar that has almost no software when I can get an iPhone 5c for free on contract with a ton of software and accessories? I know they're also good Android phones available free on contract.

SiVal 12y ago
The network effect I'm talking about is the N-squared growth in value of a network of N nodes where each of the N nodes derives most of its value from the number (N-1) of other nodes. The phone system overall has this property, so does Skype, so does Facebook, but no carrier, handset maker, or OS does, because their users aren't limited to interacting with the other users of the same carrier/handset/OS. Instead, the existing players have a benefit resulting from their size that is more of a scale advantage, in that the N users tend to have access to more things if N is larger, but those "things" are not primarily the N-1 other users. There are more iPhone apps than Android, for example, yet Android sells more units and is growing faster. Scale matters, number of apps matters, but other factors are very significant, too. Apple, therefore, does not have to be the #1 phone maker to make the most money, nor would a new entrant have to have huge scale to have a profitable business. Unlike a network effect business, a new entrant would not have to appeal primarily on the basis of how many other users it already had but, instead, on what value it offered. And you mention that Amazon couldn't get you to switch from iOS because of the number of iOS apps as if the 2 billion phone users out there all care primarily about the number of apps they'll probably never use. Yet Android phones outsell iOS with fewer available apps, and the average Android user buys far fewer apps than the average iPhone user. A significant fraction seem to be satisfied with just the apps that come with the phone and never buy another. It's not unreasonable to assume that there may be many market segments that would be fine with a few thousand apps covering 99%+ of usage PLUS something else they value more highly than the long-tail iPhone apps. Phones and phone plans that specialize in offering something more valuable than Yet More Apps might appeal to many people. Shoppers might care more about Amazon Prime than than the one game app they have to give up if they switch. Parents might care more about a managed kid phone with kid features and a kid rate plan than about Apple's app store. Since the value of phones is not primarily the number of your maker's installed base squared but is based on so many possible things, I think there is room for new entrants as long as they offer something more significant to a market than the extra apps.