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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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