Network externalities in software systems

■ Network externalities are the effects on the value of a product that can be ascribed to the presence of a network of users of such a product. They play an essential role in the business success of any product. The authors think that their role is even larger in the software industry, where (a) documentation and effective training are often lacking, and (b) consumers regard interoperability and compatibility as major benefits because of the ever-increasing need to share information and reprocess it over and over again with different tools. However, only few studies exist on this topic. Network externalities are caused by choices operating at different levels of product design data format, GUI metaphors, keyboard sequences, API, and so on. Understanding and planning their presence in a product is difficult. However, the ability to manipulate them properly provides a clear competitive advantage. This article briefly reviews the literature on network externalities, outlines a graphic notation to represent them, and applies such notation to describe an example, that of Microsoft Word 97. The study of the network externalities in Microsoft Word 97 shows several different kinds. The authors focus on the data format, the API, and the human-computer interaction paradigm. irms aim at maximizing the “value” of their products. However, the notion of value is hard to qualify and quantify. The hedonic model represents the value of a product as the sum of the values of the different components of the product [Berndt 1991]. The hedonic model has already been applied to software products in Gandal [1994]. In this paper we assume an hedonic model for the composition of the value of a product, and we cluster the components of the value into “internal” and “external.” Internal components depend on the product per se, that is, its functionality, its usability, its reliability, and so on. External components depend on the environment in which the product is located. The environment is formed by the users of the product and by other complementary or competing products. For instance, the value of e-mail service depends on the internal features of the service—availability, reliability, speed, and maximum size of the mailbox— and also on the environment, i.e., how many people we can reach using such a service. A service can supply the fastest connection or the largest mailbox, but if we cannot reach the people we want, the value we attach to the service is zero. Several researchers have investigated the value of internal components; see for example Boehm [1984] and Putnam and Myers [1992]. External components are usually called “network externalities,” since they are the result of a network of users of products and of complementary products [Farrell and Saloner 1985]. The authors think that network externalities play a strategic role in the software industry because: