The Chicken and the Egg The Network Externality Effect for Internet-based Services.

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Presentation transcript:

The Chicken and the Egg The Network Externality Effect for Internet-based Services

Network Externality Definition: Network Externality is an economists notion that the value of a product of service is proportional to the number of others using that product or service. (e.g. Fax Machines)

Network Externality in the Internet Exchange Points Cost of Svc Value Number of participants

Value of the Internet Exchange V Exchange N Participants Cost Of Coming In (Circuits+ Routers+ StaffTime) V Capacity The Exchange Startup Hump First Carrier(s) First ISP(s) First CP(s) Critical Mass Point (V exchange =Cost Exchange ) Large Facility Scaling

Drop the Cost of Participation V Exchange N Participants Cost Of Coming In (Circuits+ Routers+ StaffTime) V Capacity The Exchange Startup Hump First Carrier(s) First ISP(s) First CP(s) Critical Mass Point (V exchange =Cost Exchange ) Large Facility Scaling C2C2

Incent (Buy) Providers In V Exchange N Participants Cost Of Coming In (Circuits+ Routers+ StaffTime) V Capacity The Exchange Startup Hump First Carrier(s) First ISP(s) First CP(s) Critical Mass Point (V exchange =Cost Exchange ) Large Facility Scaling

Lower Cost of Participation V Exchange N Participants Cost(1) Of Coming In (Circuits+ Routers+ StaffTime) Cost(2) V Capacity The Exchange Startup Hump First Carrier(s) First ISP(s) First CP(s) Critical Mass Point (V exchange =Cost Exchange ) Large Facility Scaling

Incent 1 st, then Make it up when value exceeds cost V Exchange N Participants Cost Of Coming In (Circuits+ Routers+ StaffTime) V Capacity The Exchange Startup Hump First Carrier(s) First ISP(s) First CP(s) Critical Mass Point (V exchange =Cost Exchange ) Large Facility Scaling

Incent 1 st, then Make it up when value exceeds cost V Exchange N Participants Cost Of Coming In (Circuits+ Routers+ StaffTime) V Capacity The Exchange Startup Hump First Carrier(s) First ISP(s) First CP(s) Critical Mass Point (V exchange =Cost Exchange ) Large Facility Scaling

Increase price as value increases V Exchange N Participants Cost Of Coming In (Circuits+ Routers+ StaffTime) V Capacity The Exchange Startup Hump First Carrier(s) First ISP(s) First CP(s) Critical Mass Point (V exchange =Cost Exchange ) Large Facility Scaling

Guarantee Cost Savings from Peering V Exchange N Participants Cost Of Coming In (Circuits+ Routers+ StaffTime) V Capacity The Exchange Startup Hump First Carrier(s) First ISP(s) First CP(s) Critical Mass Point (V exchange =Cost Exchange ) Large Facility Scaling

Key points on the value curve