Hello and welcome to this lecture module on standards and platforms. In this module, we will rely mostly on the videos of Professor Raj Echambadi on platform businesses and how they are different from traditional pipeline businesses. I'm Professor Deepak Somaya, and I'll be primarily providing you with some context to understand Professor Raj's video lectures. Ultimately, platforms are essentially bundles of different interface standards orchestrated by a central firm who's the platform owner. Many of the strategic lessons for platform innovation and competition come from standards-based competition. The key idea in standards-based competition is that of network effects, also sometimes called network externalities. With network effects, when a new user adopts or uses a product or technology, it creates value for other users who are also using the same product or technology. Those other users, in turn, create value for the new user. Many of the products and services we consume don't have this feature. If I buy a pair of Nike shoes, or an Armani suit, or I eat a McDonald's hamburger, it has little impact on the value of these products to you. But if I'm on Facebook, or Zoom, or using an Xbox game console, it does. Why? Think of a simple market with just two users who have a choice between two network technologies. Let's say it's a social media platform. We'll call them Facebook and Myspace. What's really important here for the users to derive any value is that they both adopt the same technology. Either they are both on Facebook or they're both on Myspace. Only then will they be able to connect with each other and enjoy the benefits in this case of social interaction. This kind of spillover of value or utility from one user's actions to the other user is what economists call a network effect or a network externality. Let me caution you a little bit about this term because it has the word network in it, network effects, network externalities, I frequently see people confuse it to mean something about computer networks, or networking, or even social networking. Please keep in mind that a network effect does not necessarily have anything to do with any of those things, even though network is in the name. What it's simply means is a product or service where users benefit from other users adopting or using the same technology. There are two types of network effects, direct and indirect or virtual network effects. In the direct network effects, users derive value from the direct interconnection with other users using the same product or service. Some examples of direct network effects including connecting with friends and colleagues through, say, Facebook, or LinkedIn, or Zoom, as well as older technologies like the telephone, fax, texting, and email. In virtual network effects, the positive spillovers between users is indirect and mediated through a market for complementary goods or services. When a user adopts such a network technology, the supply of complementary products increases, which then makes the base product or service more valuable to other users. Consider, for example, the emerging market for virtual reality and augmented reality technologies, like Facebook's Oculus platform. The more Oculus products that are bought and used by consumers, the more attractive it becomes for software and game developers and even media producers to develop complimentary products and services that work on the Oculus platform. That, in turn, creates value for other users. If you see what's happening, a user buying an Oculus product is creating these complimentary products, which are then creating value for other users, so that's why the network effect is indirect. There are many other products and services that exhibit this kind of indirect or virtual network effect through a core product and its compliments, such as computers and software, operating systems and their applications, game consoles and games, etc. Importantly, most platforms are full of such complements, which create value for users and are, in turn, provided on platforms that have more users. A key result of this phenomenon of network effects is that it creates positive feedback in market competition. The more users that adopt a product or platform, the more value it creates for other users, which drives even more users to adopt it, and on and on it goes until markets get dominated by one or two major players. It also works in reverse, and that it is very difficult for a new challenger to take on a platform owner in direct competition because it is very hard to attract users. As much of the value that users derive, it's not from the platform itself, but from other users on the platform, who may be themselves sticky and unwilling to move to a new platform. This is the essence of competition in standards and platforms, which is essentially based on network effects. I will now turn you over to Professor Raj's excellent video lectures to understand platforms and platform competition and how to design and execute technology strategy in these contexts.
