Tuesday, April 3, 2012

Class # 14 Highlights

The Joy of Text
In this class, we studied commitment strategies in network markets. This was illustrated in the battle between Microsoft and Netscape for browser supremacy. We saw that the network effects in this market mainly stemmed from the developer ecosystem. The larger the install base of a browser, the more likely that developers would cluster and add value. This naturally leads to tipping in favor of a single dominant player in the market. Initially, Netscape was that leader. It had a superior browser. It was cheap for developers to build on the platform, and it had a vastly larger install base than Microsoft.

The key difficulty for Microsoft is that, even if it gave away its browser, the value proposition from Netscape was still higher for consumers. What Microsoft needed was a credible way to "sell" its browser for a negative price. The problem is that committing to charge a negative price is difficult. Microsoft solved this problem through bundling. By putting its browser together with the OS, in effect, it sold the browser at a negative price as our analysis showed. Now, a user's choice was no longer Netscape or Explorer it was Explorer versus Netscape and Explorer. This drastically changed Netscape's value proposition and allowed Microsoft to quickly gain share. Through network effects, these share gains then changed the equation for developers too and tipped the market away from Netscape.

Of course, this might have been a Pyrrhic victory for Microsoft as it unleashed years of antitrust hell that continue to this day. With the benefit of hindsight, we can see that the threat of browsers to discomfit the OS was significantly overblown. Microsoft might have been better served to have lost this battle thus avoiding antitrust scrutiny and the loss of focus that this entailed.

Key Takeaways

  • Commitment strategies can fundamentally change the game--even in markets with strong network effects.
  • Microsoft's commitment was to charge a negative price for its browser.
  • Anticipating commitment strategies is critical for rivals. Netscape might have foreseen this possibility and pre-empted it through FTC decrees and the like.

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