Wikipedia on the Network Effect:
In economics and business, a network effect (also called network externality or demand-side economies of scale) is the effect that one user of a good or service has on the value of that product to other people. When network effect is present, the value of a product or service increases as more people use it.
The classic example is the telephone. The more people own telephones, the more valuable the telephone is to each owner. This creates a positive externality because a user may purchase a telephone without intending to create value for other users, but does so in any case. Online social networks work in the same way, with sites like Twitter and Facebook being more useful the more users join.
below, keep in mind the power of the "network effect" which exponentially increases the value of a service or product as more people use it, often creating universal standards where there were none. This is how:
- Microsoft became the de facto desktop installation,
- how Google became the de facto search engine (people Google things, they don't search for things)
- how the Apple iPod became the de facto portable media player platform,
- how Facebook became the de facto social netwowk, etc.
Google is on track to become the '90s version of Microsoft on the connected smartphone., basically the de facto standard of mobile computing and communications, yet it is still valued as a search engine - see Google’s Q1 2011 Review: Part 2 Of My Comments On The Gross Misvaluation of Google. Google's innovative business models and outright acquisistive aggression has positioned in well for the future. Microsoft, the king of capitalizing on network externalities, now feels sufficiently threatened not just on the mobile computing front, but the enterprise front (which has a significant amount of overlap, as well. Tom Rizzio, a higher up at Microsoft, obviously feels sufficiently threatened to go on the FUD rampage against Google's Google Apps, which is to be expected since that is how the big tech companies operate. The caveat here is that Tom know acknowledges Google as both a signficant threat and a viable competitor in its most lucrative of lucrative franchises. As excerpted from his post on Microsft's Technet blog and more importantly as carried on in the major tech newsrags:
On the surface, Google Apps may seem like acceptable replacements for enterprise-grade products such as Microsoft Exchange Server or Microsoft Office. But many IT organizations have found that Google Apps bring extra, hidden costs. Organizations that have evaluated Google Apps have found that the projected versus actual costs of switching to Google Apps greatly increase their total cost of ownership (TCO). In particular, these IT organizations have found that Google Apps are not enterprise-ready and are inadequate without costly add-on applications, even for most small- and medium-sized organizations. The three general areas where organizations feel the Google Tax most strongly are deployment, IT support costs and user training.
For those who do not subscribe to BoomBustBlog and have not read our forensic valuation of Google (63 pg Forensic Valuation, to plug in your own assumptions see Google Valuation Model (pro and institutional) I urge you to review A Realistic Look At The Success Of Google’s Investment History to see the rate of return Google garners from its investments, for it's investing harder now than at anytime in its history and the market mistakenly takes it as a loss of control in expenses.
It is obvious that:
- Nokia (see Nokia/Microsoft Alliance & Android’s Commoditization Of The Mobile Computing Platform),
- RIM (see Blackberries Getting Blacked Out, Imitate Amateur Base Jumpers Sans Parachute!),
- Apple (Steve J,obs Calls End Of the PC, We Call The End Of The Fat Margin Tablet – Including The Pretty iPad, With Proof!)
- and Microsoft
fail to view Google as the market does. The reason is that these guys know what time it is. Remember, the market is still valuing Google as a search engine and advertising company. This is how Microsoft is looking at Google and why Tom Rizzio is bitching in the excerpt above...
Google Inc. won a major victory in a lawsuit against the U.S. Interior Department this week when a federal judge ordered the federal agency to hold off on a request for a bid to upgrade its e-mail system after Google argued that the process favored rival Microsoft Inc.
Susan Braden, a federal judge in Washington, issued a preliminary injunction that blocks the Interior Department from deciding to use Microsoft's e-mail and other software for its 88,000 employees. The order was unsealed Tuesday.
The contract, worth up to $59 million, is part of the federal government's migration to Web software. Google asked for the injuction, arguing that the bidding process was designed with Microsoft products in mind.
Braden ruled that Google had made a preliminary showing that the Interior Department violated rules covering competition in contracting and sent the matter back to the agency. Braden wrote that the injunction served the public interest and prevented "competitive harm" to Google. But she did not find any basis "to support Google's allegations of bad faith."
The Interior Department could appeal Braden's decision or modify the bidding process. A spokeswoman from the agency declined to comment on "ongoing litigation."
The ruling comes as Google and Microsoft compete to win business from federal, state and local governments in the lucrative arena of supplying online e-mail and other software. The Internet search giant is taking on Microsoft in the government market, which Microsoft has long dominated.
This is not Google's only victory in large scale cloud installations against Microsoft. See Google's 'Gov Cloud' Wins $7.2 Million Los Angeles Contract:
Having largely resolved concerns about privacy, cost, and security, the City of Los Angeles has "Gone Google."
The Los Angeles City Council on Tuesday voted unanimously to approve a $7.2 million deal with IT contractor Computer Sciences Corp. to replace the city's existing Novell GroupWise e-mail system with Google Apps, Google's suite of online communication and productivity programs. Microsoft Office licenses will be reduced but not eliminated, as select city workers will continue to use Microsoft's software.
The hotly contested deal calls for shifting about 30,000 city workers over to Google Apps in the next year.
Part of the reason Google won the deal appears to be cost: The City Administrative Officer (CAO) expects "Going Google," to borrow Google's marketing catch-phrase, will cost the City an estimated $17.6 million over five years. Remaining with Novell, the CAO estimated, would cost $23 million.
Smartphones, tablets, de facto desktop search and the cloud combine to make a lethal combination to competitors. Witness the network effect in action and realize exactly how powerful a search engine can be when enough people use it.
The most recent tally from the metrics companies are out and as was expected, Apple's Verizon launch did much in significantly boosting their numbers, but...
... reporting key trends in the U.S. mobile phone industry during the three month average period ending January 2011. The study surveyed more than 30,000 U.S. mobile subscribers and found Samsung to be the top handset manufacturer overall with 24.9 percent market share. Google Android took the lead among smartphone platforms with 31.2 percent market share, after two short months in second place.
OEM Market Share
For the three month average period ending in January, 234 million Americans ages 13 and older used mobile devices. Device manufacturer Samsung ranked as the top OEM with 24.9 percent of U.S. mobile subscribers, up 0.7 percentage points from the three month period ending in October. LG ranked second with 20.8 percent share, followed by Motorola (16.5 percent), RIM (8.6 percent) and Apple (7.0 percent).
|Top Mobile OEMs
3 Month Avg. Ending Jan. 2011 vs. 3 Month Avg. Ending Oct. 2010
Total U.S. Mobile Subscribers Ages 13+
Source: comScore MobiLens
|Share (%) of Mobile Subscribers|
|Total Mobile Subscribers||100.0%||100.0%||N/A|
Smartphone Platform Market Share
65.8 million people in the U.S. owned smartphones during the three months ending in January 2011, up 8 percent from the preceding three-month period. Google Android captured the #1 ranking among smartphone platforms for the first time in January with 31.2 percent market share. RIM ranked second with 30.4 percent market share, followed by Apple with 24.7 percent. Microsoft (8.0 percent) and Palm (3.2 percent) rounded out the top five.
|Top Smartphone Platforms
3 Month Avg. Ending Jan. 2011 vs. 3 Month Avg. Ending Oct. 2010
Total U.S. Smartphone Subscribers Ages 13+
Source: comScore MobiLens
|Share (%) of Smartphone Subscribers|
|Total Smartphone Subscribers||100.0%||100.0%||N/A|
|Google (via Android)
Of course, these numbers from Comscore don't take into consideration the full effect of Apple's Verizon iPhone release, which made (by far) the biggest contribution to the best performance I have seen a large company produce, ever. So, let's look at the numbers that do capture the full "free iPhone" effect...
As you can see, Apple's iPhone launch contributed heavily to a near 115% jump in shipments and a 3 percentage pop in market share. Those are some heady numbers, that, when combined with the RIM's fumbling places then 2nd in smartphone shipments. But... those guys who have been pushing Google's Android have literally grown their shipments several multiples of that of Apple. Samsung up 350%, HTC up 230%!!! Apple's big pop came from its introduction of the iPhone on the nation's second largest carrier. This is a stunt that cannot be replicated for similar results. It does appear that Apple is prepping iPhones for T-Mobile, and maybe even Sprint, but they will not get this same effect. If the Android vendors repeat or increase this rate of growth next quarter (which is the most probably scenarios since both Samsung and HTC have produced phones which are mainly acknowledged to be the best there is by the media) while Nokia and RIM continue their slide (also quite probable - Blackberries Getting Blacked Out, Imitate Amateur Base Jumpers Sans Parachute!), then Samsung will capture the 1 or 2 spot by next quarter while HTC will be in the 2nd spot or 3rds spot just behind Apple.
Remember the power of the network effect. It turns externalities into cold hard cash faster than many would be led to believe by Apple's marketing staff:
- AT&T’s Q1 Record Results Show That There Is More Money In Android Than There Ever Was In Apple: How Do You Compete With Less Than Free?
- Verizon’s Earnings Confirm The Economic Impact of Android vs iPhone In Regards To Carrier Profitability
If you can't see how Google will monetize Android yet, picture the network effect as Android takes over and Google starts to charge ala Microsoft, et. Windows!