1. Digital Platforms
Network effects

2. A $26 Billion Cash Deal

3. Extreme valuations created skeptics and enthusiasts
June 2015
June 2016
$191
n/a
$25B
$3B
-$165M
Less than 2% NI/R
to recoup the money spent MSFT needs to increase revenue across all products by about 2.5% compound every year across all products or 7% for office and bus sw.

4. Google Hire… a competitor?

5. A digital platform is technology that connects participants

6. Types of Platforms One-sided Two-sided Three-sided n-sided…
Dynamics: how wtp grows / declines with network size. Metcalfe’s law WTP grows with the N^2 (because of N*(N-1)). Einsenmann says no, it is more S-shaped (decreasing at the margin, because (a) per capita transaction volume does not usually grow with the size of the network (the # of calls I make does not) and (b) WTP per transaction does not remain constant (more people come in who have less WTP).

7. Network effect = platform participants experience a change in the value of the platform when the number of participants changes.

8. The value of a platform changes for the participants when their changes
What is the digital platform?
Who are the participants (or sides)?
Explain clearly why the value of the platform goes up or down for the participants (not for the owner of the platform) when more people join the platform.
Network externalities: a benefit (or harm) experienced by party B due to the action of party A without compensating payment between the parties.

9. 1. What is the digital platform. 2. How many sides. 3
1. What is the digital platform? 2. How many sides? 3. Explain clearly why the value of product/service changes for the participants when more people join the platform.

10. The value of a platform changes for the participants when their changes
What is the digital platform?
Who are the participants (or sides)?
Explain clearly why the value of the platform goes up or down for the participants (not for the owner of the platform) when more people join the platform.
Network externalities: a benefit (or harm) experienced by party B due to the action of party A without compensating payment between the parties.

11. OK, We have network effects. So what?

12. “because of network effects, platforms enjoy increasing returns to scale. Users will pay more for access to a bigger network, so margins improve as user bases grow” Eisenmann et al 2006

13. What are the big strategic decisions?
Pricing
money side, subsidy side, same-side
Winners-take-all dynamics
multihoming costs economies of scale
Envelopment