The Network Effect on Software Quality
MIT’s Sloan Review recently published an article by Tellis, Yin and Niraj about the network effect versus quality in determining which high-tech products win the largest market share. Certainly an interesting article with the reassuring message, that the product with the best quality, and not market dominance, will eventually prevail. It just seems fair.
What is the ‘network effect’? The term refers to the situation, where a current market dominant product (e.g., due to early market entry) provides access to a larger number of services and accessories, and has greater general or social network brand awareness – the network effect plays in favour of the current market dominant player preventing new players to take the leading position. For example, Microsoft Windows might be preferred due to a (perceived) greater number of 3rd party applications, or Facebook because everyone else is there.
However, there is one aspect which the researchers do not seem to have considered – the situation where the network influences the perception of a product’s quality. 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 is, 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).
Microsoft won the majority of the word processing market prior to email and the Internet enabled a greater sharing of documents, but once the Internet had gone mainstream, it basically eradicated whatever market share was left for other vendors. The only ‘competitors’ left in today’s market is those with a cost of zero (LibreOffice/OpenOffice, Google Docs etc).
I think we’d all like to think that quality always wins – it just seems fair – but the perception of quality is sometimes linked with the network effect. 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. I.e., 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.