Essay number 1 (Network effects) Flashcards
What is the structure of the essay?
Introduction:
- Define network effects
- Indirect and direct network effects (Google)
- Metclafs Law
- Autarky and Synchronisation benefits
Body:
- Background of Betfair case study
- explain how they managed to become dominant with the use of network effects
- explain pros and cons with the network effects
Conclusion: summarise key points, of how they achieved network effects
Define Network effects
Creation of value through the increased number of users of a product or service online.
Distinguish between Autarky and Synchronisation benefits
- Autarky Benefits: are benefits of sole ownership (ex; don’t get more value from others eating a cheese burger)
- Synchronisation benefit: benefits from others having the product (ex; Skype)
as the market share goes up, synchronisation and the total value increases, whilst autarky benefits remain the same.
What is Metcalfs Law?
The value of network is the square sum of its members of users. when one network gets a small advantage in terms of users, then its net value increases significantly, giving it a competitive advantage
What are the existing types of network effects?
- Direct network effects: an increase in usage leads to direct benefits to other users such as; Skype. WhatsApp
- indirect network effects: it is a two sided effect or multi-sided.
- distinct group is attracted by the presence of the other side. wide phenomenon in business
- provider is known as the platform
- development of complementary products due to network product
How do you enter markets with network effects?
HELP BM VC
- VALUE PROPOSITION: (not first, focus creating liquid market + enough participants) e.g. Bet fair
- LIQUID MARKET: early stage firm is not established and is vulnerable to better propositions but with liquid market= high lock in.
- HIGH SWITCHING COSTS: (Like eBay vs. Groupon)
- PRICING: two sided market, consider whether they can be (one side), subsidised or incentivised.
- COALITIONS: if lack network effects, work with others (bet fair moving from own platform into shared one)
- BRAND CREDIBILITY: amazon entering marketplace in competition with eBay
- ENVELOPMENT: existing network effects are moved from one market to another (Linked-in)
- MAJOR CUSTOMERS for B2B markets: scale of a firm can provide network effects
What year did Betfair.com launch? and when did it become the dominant player of person-to-person betting?
2000 & 2001
What was the unique innovation that it provided?
it enabled people to bet directly against each other (person-to-person betting) thus cutting out the bookmakers (disintermediation)
- Laying: Users could take on the role of the bookmaker and offer whatever odds they wanted, creating a free market. To ensure bets were settled funds would have to be deposited with the exchange.
Backing: A user could accept the odds on offer, or in a further departure from the bookmaker controlled market, request better odds which a layer may decide to accept.
Who dominated the LBO (licensed betting offices) sector previously?
Was traditionally dominated by the ‘Big Three’ fixed odds bookmakers, Ladbrokes, William Hill and Coral, who had a combined market share of 60% in 2000
Who was Andrew Blacks, Betfairs.com rivalry?
Flutter.com, had first mover advantage
How did Betfair.com manage to raise 100,000 bets in a week?
- betting exchange concept created a liquid market, there was mutual benefits since the users could act as multiple roles, representing both sides of supply and demand (baker and layer)
- attracted both sides of the market creating direct network effects
- maintained liquidity in hard times through:
1. idea of a commission scale, 2%-5%
2. cash out” concept
3. left their own platform and joined a network which pooled the players of smaller poker providers. + teamed up and merged with Paddy Power
genuine innovation and superior design= liquid market. Realisation of need to incorporate more aspects of traditional sector + partner up with a number of companies
Incoporate other parts of the course in the essay?
Flutter managed to move to an exchange model, similar to Betfair.com, which made it a serious rival. this can be related back to the weaknesses of operating as a dot com, as business models can be easy to copy.
- betfair made sure to merge in other categories of the market to lower risks and increase its influence by becoming a sponsor of sports, such as horse races. also offered other products such as the launch of a casino.
