Magazine Summer 2011 Research Highlight

How Quality Drives the Rise and Fall of High-Tech Products

The conventional wisdom is that products that have a strong established base of users can often trump higher-quality alternatives. But recent research suggests otherwise.

Gerard J. Tellis, Eden Yin and Rakesh Nira Reading Time: 5 min 

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Image courtesy of Flickr user 1541.

Why does the free Linux operating system not make more headway against Microsoft Windows? Why does Apple still only sell a minority of the personal computers in the United States despite its devoted followers and the runaway success of its iPad, iPhone and iPod? One answer involves what economists call network effects — a term that refers to the additional benefits that accrue to a product or its accessories with an increasing number of users. For example, far more programs run on Microsoft Windows than on Linux.

In economics, the conventional wisdom is that network effects can and often do overwhelm quality considerations, enabling early market entrants to dominate a market even with inferior products. The classic example is the success of the QWERTY keyboard over the supposedly superior Dvorak keyboard. Some economists have argued that new consumers choose their brand primarily on the direct or indirect benefits accruing from the network of current users, rather than solely from the intrinsic quality of the brand.

However, based on our historical analysis of 19 markets for technology hardware, software and services in the 1980s and 1990s, we found that while network effects do affect market share flows, quality prevails. In our study, we defined quality as a composite of the brand attributes (such as reliability, performance and convenience) that customers valued. We then derived our measure of quality from the reviews in four of the most respected and widely circulated computer magazines of the time. We selected the personal computer products and services markets because these markets are supposed to exhibit strong network effects. Yet we found that not only did quality prevail in these markets, but network effects enhanced the role of quality. In other words, network effects drove customers to quality and superior brands.

How Quality Wins

If network effects were dominant, an early entrant would dominate a market, and there would be no subsequent changes in market leadership. But in the markets we studied, there were frequent changes in market leadership:

  • The average duration of market leadership ranged from 5.5 years in operating systems to as short as two years in Web browsers.
  • The average duration for market leadership in the markets we studied was only 3.8 years.
  • In 10 markets, there were multiple switches in market share leadership.

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About the Authors

Gerard J. Tellis is a professor of marketing, Neely Chair of American Enterprise and the director of the Center for Global Innovation at the University of Southern California’s Marshall School of Business in Los Angeles. Eden Yin is a university senior lecturer in marketing at Cambridge Judge Business School, University of Cambridge, Cambridge, United Kingdom. Rakesh Niraj is an assistant professor of marketing and policy studies at the Weatherhead School of Management at Case Western Reserve University in Cleveland, Ohio. The authors’ research study was supported by a grant from Don Murray to the USC Marshall Center for Global Innovation.

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Comments (7)
Building Minimum Viable Products at Spotify
[…] at USC Business School, believes that product quality has become so important in recent years that network effects alone will no longer protect companies who are first-to-market. In fact, network effects actually reinforces competition for quality by driving customers to […]
mike
Using Apple as the example - this company poured millions into it's marketing campaign for the iPod. It's true that quality (and innovation) are needed for success but significant market 'clout' is hard to beat! Many, many superior products have fallen behind lesser ones due to inadequate promotion.
Siswanto Gatot
I think product quality means customer perspective, this perspective is boosted by media penetration
John Brøndum
The network effect can also impact people's perception of quality. Poor cross producet compatibility in the case of word processing software has certainly played in Microsoft's favour - the market leader for well over a decide now. Blog post on the topic: http://wp.me/pU9dc-cs
d.gavrilovic
Why does the free Linux operating system not make more headway against Microsoft Windows? 

This question is not that simple to answer as there is much more than quality at play. Some of it is market dominance, some of it is support and training related. But if you were to question quality, it's good to keep in mind that the point of the "bazaar" (aka Linux) influence on quality is that you have a very very large distributed and self correcting quality management developer and testing teams vs the "cathedral" (aka Microsoft) where you have a much smaller group which is responsible for the quality of the product.
lfeldman257
I have to question the authors' methodology. The definition of "quality" seems extremely subjective. For the historical products and categories that you analyzed, how did you determine what brand attributes were valued by customers at the time, and how did you weigh those attributes?

You measured quality as determined by "four of the most respected and widely circulated computer magazines of the time". In the 1980s and 1990s, did these four (unnamed) magazines have consistent standards and testing methods? Further, this was a period when published reviews were heavily influenced by manufacturers, especially Microsoft. It's well-documented that Microsoft would retaliate against publications that dared to print negative, or even equivocal, reviews of its products. (InfoWorld is a good example.) Microsoft would commonly refuse to allow such publications to review future products, which was, in essence, a death sentence for the publications. As a result, reviews often had little or no correspondence with reality, and many readers knew it.

I'd like to see how you determined what the actual measures of quality were, determined historical consumer preferences for quality (vs. price, for example), and corrected for editorial changes, biases and manufacturer influence in the reviews.

Best wishes,
Leonard Feldman
syalabhishek.a
True.. but this holds true when majority of consumers are fence-sitters..