alright
so let's talk about information
X one key concept extra now
so what is the best turnout X now daas
I the impact of
a transaction on a user
not involved in that transaction okay
so what do I mean by that so there's negative externalities
friends than when you put up a coal plant
or when you put up a nuclear plant
right so folks who
you know I may decide look do not consume 100 percent solar
but if there's a coal plant sixty miles down the road
I all that pollution is going to affect me
has can affect my water my air
my health right that is negative
externality when a nuclear plant goes BOM
that's a negative externality
aid I mean look at Fukushima and eighty
they're still paying the price and they aren't going to pay the price
for the next ten thousand years right that's an
it if externality even for those who
did not buy electricity from that nuclear plant
does that make sense okay so the impact on the user
not involved in that transaction now what's a positive externality
positive externality years an important in education
so some of you are investing in your education
you gonna go out you gonna start a company or
you know this is going to improve your chances self you know
developing the better product which means that
you know not only you are going to earn more money
but your team is going to be better off
and your company is going to be better off even though they didn't pay for your
education
does that make sense that is a positive externality
your society is better off because
you invest that in education does that make sense okay
now there are cases when the externality
could be positive are negative as in the case of real estate
if the sup house sold
two blocks from you and they salted
I you know price less than I
six months ago the is that going to affect your
house value yes okay
now what if it's all that ten percent about the price it's also going to
affect you
REITs and real estate can have both negative and positive
s analysis yes question
yes
exactly now there's also the concept of
network externalities right
now network effects or network externalities
is I when their value
of then network of the product
the Benz on the number of other users
who are participating in that network K
I
on when it's a network
their value goes up exponentially
okay now
the cases are for instance payment network
so be some MasterCard is our payment networks
operating systems the value of Windows
or apple i OS or Android
is not in the product itself but in the network
of users application developers
and so on and and and smartphone developers
that's a network okay I
and in the case of network externalities
the value of the network goes up
by an square
a up and where n is the number of users
so if you think of a telephone network
okay or an email network or a social network I mean imagine Facebook with
to users that saw how useful is that
not very now if Facebook owes up to 3 users
then for than 5 their value to all of you
goes up exponentially does that make sense
so in that case on the telephone
to telephones this is the value 1
but if there are 5 all these interconnections
it's an square and at this point
its you know the value goes up like that and that's why
the value of that's why Facebook
it's worth $200 billion dollars because the network
of users is worth that much
not because their data centers are worth anything
or their software is worth anything it's because
of the user's does that make sense and it's because it's a network
now network effects
are not the same as learning effects okay
so up all our economies of scale
so them more cars a company makes
they're cheaper they can make them because
there are economies of scale they can buy
aluminum or steel cheaper they can buy supplies cheaper
and so on and the so that valued the cost per car
is gonna be smaller those are economies of scale
this is not the same I us network externalities
where the value goes up exponentially does that make sense
so there's a big difference between say
Google search were every search
adds to the value of Google search but not exponentially
it out incrementally to the value of Google
whereas every new user on Facebook
or Google+ or link them at exponentially
to the value of all the other existing users
does that make sense now did you have a question
yep
potential
yeah it depends
on their business model right so that's a good question
so eight the old AT&T rate had two hundred
million I phones in america
that was the network the telephone network how did they make money
they make money by leasing other phone
I mean isn't that weird I mean up until not long ago
you could not own your phone AT&T you had two leases from AT&T
so you'll Easter phone from AT&T then you had to pay them to install it
and then you had to pay them for
you know making phone calls and then had to
pay them for long-distance so these were all revenue models for AT&T for that
network
for visa that network how do they make money
for that payment network they charge two or three percent of every transaction
right so each network has its own
revenue model at the value
to visa to Facebook to AT&T
goes up exponentially does that make sense which is not to be confused with
revenue model
K revenue potential is more like it right
yes good
sheik
yeah yes so should companies create network effects
so here's the answer I not our product categories have network effects
exactly the article does have network effects right
because it's it's the the more I
you know databases they're out there the more
you applications are made for Oracle
the more programmers program for Oracle them you know thomas also they have
network effects
I you know try and get out of or call you can't
that's why or cause such a cash machine
a car company does not have a network effects right
exact and that's the old industrial model where the power
was more and the product right
in the case of steel the parlous
the more mines I our own the more power
and that's still the case in oil right
the more oil wells more oil I have
the more power Frank but in the case of information economics
I you know when does operating systems
payment networks and so on these are networks
and the value goes up exponentially I
does that make sense so you have to now depending on the
product category whether
their is you know in fact their network effects
because this will make all the difference in your strategy
why so let me talk about another thing switching costs
when I come back to this the economy talk about
icing I so switching costs
I would be the cost or risk for users
to switch to competing offerings
how art is it for a user to switch
right now high market share does not eat well
I high switching costs and companies like netscape
paid the price when you know they didn't realize that
have an eighty percent market share did not mean
the there were high switching costs
they were exactly one click away from Lowes
the market to I Microsoft
for instance which they did and
Google with search also realizes that there one click away
from losing their sixty or seventy percent share of search
great there are no network effects I
so it's the cost to switch to a competing offering now
I lot n huh pans
when switching costs are substantial
substance substantial depends on to
Conakry right so how easy is it to get out of windows
very difficult that's why Microsoft
has made amends on windows for twenty years
because it's hard to get out UK
especially if they're you know products that only run on Windows
if you have all your data and windows and all your products just run on
Windows
it's hard to get out right it's painful
so Oracle once you have your Oracle databases
good luck getting out right you can't
I so dots what's called lock and your lot then
reluctant now
here yes I the key thing that we need to get out of this in terms of strategy
I so you know well i'm saying about
about high market share does not mean I
high switching costs Nokia nokia has gone
in two years from forty percent to 10 percent on the market
two years okay I love the smartphone market
which shows you that high market share into
in the cell phone market does that mean
a height switching costs
and here's what you need to get out of this
network effects virtually guarantee
a winner take all market
when there are network effects by and large
there will be one winner period
I and everyone else second third fourth
if they can survive are going to only take you know
pieces and that some thought that market K
so in the case of property systems for the PC
came over when does one right
and you know up almost went bankrupt
I N 97 I mean David there was no room for
two winners in the operating system market
financial exchanges I
payment systems you know there's the San MasterCard
and they use basically the same network I voltage
that's why you know in the US for instance we use a 120
vaults in Europe depending on the country 22 any
to forty you can switch
once the network the grade
has been established it's over
right switching costs are you're not then
in other words K and
in fact it's so hard to switch that some countries
have two different grades
I kid you not because you can swap
one great once its one
10 or 120 or 220 I
it's really hard so basically I
if there are network effects like a said
virtually guarantees a winner-take-all
market what does that mean for your strategy
where that means they say you cannot make a mistake
the number two
is gonna lose okay now who's number two
to Facebook for instance in the you know social networking space
myspace is it still alive
I is LinkedIn 9 the same space as Facebook
name Susi link then made the
the great the session to focus on
a different category right more of that business
usage instead of the social quote-unquote
the Osage right I and that was a way for them to get out of the
the you know the the at the time
it was Friendster I think the winner and the
Friendster and MySpace and then long right
what do you think
glass door never
up
exactly exactly right is anyone
adjoining anything other than LinkedIn for business
i've seen. branch out yeah
a okay I branch out have seen it
I mean I've seen the exactly
exactly do you really so in terms of
this topic which is Network facts I think that for the business usage
the winner has been linked in it doesn't mean
that they're gonna be the winner forever right but think that
once you have all your contacts
in all your information and all that on and groups
on LinkedIn it's hard to get out okay
and and let me get back to you and it proves also the point that its demand
side economics
the value of Ling 10 is and your data
not in their servers are there suffer or anything like that
right now if branch out or whoever
provides a you know radically
a new way of doing things
in a way that's 10x what we get from 9-10
they have a chance right but if all they're doing
his mimicking link them that's not good enough