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The Next PayPal Mafia? Congestion occurs due to overuse. The applicable analogy is that of a telephone network. While the number of users is below the congestion point, each additional user adds additional value to every other customer. However, at some point the addition of an extra user exceeds the capacity of the existing system. After this point, each additional user decreases the value obtained by every other user. In practical terms, each additional user increases the total system load, leading to busy signals , the inability to get a dial tone , and poor customer support.
Assuming the congestion point is below the potential market size, the next critical point is where the value obtained again equals the price paid. The network will cease to grow at this point if system capacity is not improved. Peer-to-peer P2P systems are networks designed to distribute load among their user pool. This theoretically allows P2P networks to scale indefinitely.
The P2P based telephony service Skype benefits from this effect and its growth is limited primarily by market saturation. Network effects are commonly mistaken for economies of scale , which result from business size rather than interoperability. To help clarify the distinction, people speak of demand side vs. Classical economies of scale are on the production side, while network effects arise on the demand side. Network effects are also mistaken for economies of scope. Word of mouth and the Bass diffusion model are also potentially applicable.
If some existing technology or company whose benefits are largely based on network effects starts to lose market share against a challenger such as a disruptive technology or open standards based competition, the benefits of network effects will reduce for the incumbent, and increase for the challenger.
In this model, a tipping point is eventually reached at which the network effects of the challenger dominate those of the former incumbent, and the incumbent is forced into an accelerating decline, whilst the challenger takes over the incumbent's former position. This does not, however, mitigate industry-wide lock-in to the standard itself.
Indeed, as there are now multiple vendors driving down the price and increasing the quality, more users are likely to adopt the standard thereby creating greater industry-wide lock-in to the standard. Additionally, there are two sources of economic value that are relevant when analyzing products that display network effects:.
Negative network externalities, in the mathematical sense, are those that have a negative effect compared to normal positive network effects. Just as positive network externalities network effects cause positive feedback loops and exponential growth , negative network externalities create negative feedback and exponential decay. In nature, negative network externalities are the forces that pull towards equilibrium, are responsible for stability, and are the physical limitations preventing states from reaching infinity.
Interoperability has the effect of making the network bigger and thus increases the external value of the network to consumers. Interoperability achieves this primarily by increasing potential connections and secondarily by attracting new participants to the network. Other benefits of interoperability include reduced uncertainty, reduced lock-in, commoditization and competition based on price.
Interoperability can be achieved through standardization or other cooperation. Companies involved in fostering interoperability face a tension between cooperating with their competitors to grow the potential market for products and competing for market share.
In communication and information technologies, open standards and interfaces are often developed through the participation of multiple companies and are usually perceived to provide mutual benefit. But, in cases in which the relevant communication protocols or interfaces are closed standards the network effect can give the company controlling those standards monopoly power.
The Microsoft corporation is widely seen by computer professionals as maintaining its monopoly through these means. One observed method Microsoft uses to put the network effect to its advantage is called Embrace, extend and extinguish. Mirabilis is an Israeli start-up which pioneered instant messaging IM and was bought by America Online. By giving away their ICQ product for free and preventing interoperability between their client software and other products, they were able to temporarily dominate the market for instant messaging. Because of the network effect, new IM users gained much more value by choosing to use the Mirabilis system and join its large network of users than they would using a competing system.
As was typical for that era, the company never made any attempt to generate profits from their dominant position before selling the company. Stock exchanges and derivatives exchanges feature a network effect. Market liquidity is a major determinant of transaction cost in the sale or purchase of a security, as a bid—ask spread exists between the price at which a purchase can be done versus the price at which the sale of the same security can be done.
As the number of buyers and sellers on an exchange increases, liquidity increases, and transaction costs decrease. This then attracts a larger number of buyers and sellers to the exchange. The network advantage of financial exchanges is apparent in the difficulty that startup exchanges have in dislodging a dominant exchange. Companies, governments, schools, hospitals, not-for-profits, and NGOs, among other organizations, increasingly realize that they need to interact with their stakeholders not just online but via smartphones and tablets.
It is only a matter of time and perhaps not much time before the Internet becomes a mostly mobile phenomenon. The revenues generated by the mobile Internet ecosystem are a big contributor to global GDP. See Exhibit 3. Smartphone users in the U. Even in the economies where the mobile ecosystem is most mature, such as Japan and South Korea, annual growth will still be around 10 percent.
In the major economies of the U. The single largest contributor in the future will be apps, content, and services, fueled by the rapid expansion of mobile shopping and advertising. Revenues are only one part of the picture. The mobile Internet is a major job-growth engine as well. We estimate that it has created employment for about 3 million people in the 13 countries we studied. Many of these jobs are in Asia, where the manufacturing of mobile devices is centered.
But the rapid growth in device sales has also generated retail jobs throughout the U. Network and infrastructure installation and maintenance take place worldwide. Jobs related to mobile operating systems and enablement platforms, which handle everything from hosting to security to billing and payment, are based primarily in the U. Most employment is associated with devices and with apps, content, and services. These jobs tend to be created in countries with well-educated and skilled workforces, and their numbers will grow as activity in these and other segments of the ecosystem expands.
A significant proportion of these positions are entrepreneurial and situated in small enterprises—young or maybe not so young men and women hoping to impress users with the next big thing and hiring others when they do. With revenues across the mobile Internet ecosystem forecast to more than double by , there will be a related—and a significant, if not a proportional—increase in the number of jobs generated. Some of these will replace jobs currently found in the broader Internet ecosystem—for example, positions related to earlier generations of feature phones, particularly in developing economies.
We also expect a substantial number of new jobs to be created as the demand for apps, content, and services rises disproportionately with the increase in the installed user base. The advent of new apps that automate and enhance existing activities, in fields such as health care and education, should help fuel this growth. Many of these jobs will require a high level of technical skill and creativity, and it will be important for governments to support appropriate education, training, and mobility programs to ensure that their workforces are in a position to take advantage of the opportunities that will be generated by the mobile Internet.
Rapid growth in developing markets stems from fast-rising penetration rates and increasing 3G and 4G coverage, both of which are propelling growth in apps, content, and services. India is growing at almost 40 percent annually; China and Brazil are growing at more than 25 percent a year. This growth is having a measurable impact on GDP, a direct effect on employment, investment, and consumption, and an indirect impact on productivity, entrepreneurship, and information flow. Among the markets that the GSMA categorizes as fast growers, Brazil exemplifies the kind of impact that the mobile Internet can have on a national economy.
There are more mobile connections in Brazil than people million connections in a population of million. Some 75 million of these connections are used by smartphones, a 42 percent increase over By , three-quarters of the population is expected to own a smartphone. New legislation provides tax exemptions for smartphone handsets. In , Brazil successfully auctioned spectrum licenses to the four major mobile operators for mobile broadband in the MHz frequency band for rural coverage and the 2. Mobile broadband has exploded from 7 million lines in service in to 70 million today.
Mobile 4G services were launched in April in major state capitals. A doubling in mobile data use increases GDP per capita by 0. Faster connections also bring benefits. Launched by two friends in Beijing in , Papaya was one of the first app developers to bring social gaming to mobile devices. The company has opened its platform to all developers of social games for mobile devices and offered monetization tools to help developers profit from their endeavors.
It also launched AppFlood in to sell marketing and advertising tools and Papaya Studio, an incubator for game developer teams. Growth took off after Payaya opened up its platform. Today, the company has million users and more than 1, games, up from 15 million users and games in AppFlood connects users with 82, apps and delivers more than million impressions daily. The company has employees and offices in London and San Francisco.
Not all developing markets are experiencing similar levels of growth. The GSMA has identified two categories in the developing world. More than million smartphones were sold in China in the second quarter of , according to The Economist , and eight of the top ten smartphone manufacturers were Chinese companies. In the discoverer category, three hurdles to higher penetration rates are lack of affordability, limited network coverage, and an unfavorable investment climate, and these can be formidable.
Low income levels in many developing markets are the largest constraint on adoption. Extending networks to rural areas with little or no infrastructure is costly and promises little financial payback, since populations in which incomes are low generate low returns. Unpredictable regulation, high taxes, and high spectrum prices raise costs and slow adoption.
In these developing countries, in particular, governments that take the long view can realize significant benefits. For example, a number of countries have policies that encourage digital and mobile technologies to leapfrog those of nations with more developed tech industries. South Korea highlights the benefits of policies that encourage innovation and competition. Before , local manufacturers dominated the mobile handset market as regulation discouraged foreign companies from competing.
Almost 80 percent of handset sales in were generated by Samsung and LG Electronics. Despite state-of-the-art technological capability including a well-developed 3G network , smartphone sales were limited by high prices, poor user interfaces, and a lack of Korean-language apps. The removal of regulatory restrictions was followed quickly by the entry of foreign OEMs.
Apple launched the iPhone in Korea in late , and Android-powered phones appeared shortly thereafter. Competition, both between the two ecosystems and among Android-device manufacturers, has been intense. As of the end of , more than 50 percent of all actual connections were 4G. Thanks in part to these kinds of supportive policies, exports have grown quickly. Samsung and LG are now leading device manufacturers, shipping their products around the world. South Korea is also fast becoming a hub for start-ups in the Asia-Pacific region. The number of Korean Android app developers has tripled over the past two years, and South Korea is now one of the top five countries in the world for app developers using the Android operating system.
Numerous rising stars are achieving global prominence. With more than 65 million downloads, ColorNote is the top note-taking app in Google Play in 50 countries. Almost 95 percent of its users are based outside of Korea. Users of the KakaoTalk free calling and messaging platform can follow their favorite brands and celebrities, receive coupons, and purchase goods.
KakaoTalk has million users in 15 languages. Big business is benefiting as well. Samsung and LG Electronics have become multinational mobile technology leaders in handsets and other devices. Samsung manufactured more than 30 percent of the smart devices sold in in the 13 countries we surveyed up from 7. LG shipped almost 5 percent of the devices sold in in the surveyed countries, compared with 4 percent in The company was an early innovator in dual-core processors.
South Korea is also home to many companies that design and manufacture the components that go into all kinds of smart devices and other consumer electronics, such as touch screens, LCDs, antennas, and modules for cameras and keyboards. National broadband plans can have a big impact as well. History also shows that competitive markets speed both broadband and mobile penetration.
One of the biggest infrastructure constraints common to both developed and developing markets is the availability, allocation, and use of mobile spectrum—the bands of radio waves over which data and voice communications as well as other over-the-air media travel. These include improved education, health care, and nutrition. By , better distribution of life-saving information could save 1 million lives in sub-Saharan Africa through avoided malaria, HIV, and perinatal conditions. Using mobile technologies to track food deliveries, monitor food temperature, and optimize delivery routes could save enough food to feed 40 million people the population of Kenya in —simply through reduced spoilage.
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Mobile apps—the software programs that perform designated functions on a mobile device—may be the fastest growth story in recent history. Originally designed primarily for productivity purposes mobile calendars, for example and information retrieval e-mail , mobile apps quickly expanded into numerous other fields, including gaming, navigation, health and fitness, media consumption, communication, and commerce, to name a few. App developers have made 1. In alone, apps were downloaded billion times globally of which 9. Downloads are forecast to rise to billion 15 billion paid by Even with the astronomical growth in the app economy, many app developers still struggle to monetize their endeavors.
Developers are faced with a challenging business environment: a hit-driven market, in which relatively few apps gain critical mass, and low barriers to entry, with copycats and knockoffs of successful apps an all too common phenomenon. Large developers backed with big resources can tilt the playing field by paying to advertise their apps through a variety of channels. As a result, many independent developers earn little.
App developers, along with others throughout the mobile ecosystem, face continuing challenges in such areas as security. Threats are on the rise. Reports of mobile malware rose percent in the 12 months ending in June , with some 15 million mobile devices reportedly infected in , up from Just as Windows has been the target of most malware aimed at desktop operating systems, the most popular mobile operating systems are targeted because they are where the largest number of users can be found. Fragmented open-source code can be more vulnerable to malware, and third-party app stores are key targets.
One response from entrepreneurial developers has been new apps designed to secure phones such as MobileIron, Samsung Knox, and XenMobile , but these usually rely on installation and updating by users rather than by device manufacturers. There are signs that consumers are purchasing apps on the basis of security and privacy. Threema and Telegram are two popular chat apps that stress their encryption and security. In the face of these and other challenges, developers are using a variety of strategies to adapt. For example, some are choosing to specialize, producing niche apps in narrow fields such as wedding planning where they can charge a premium.
Building sustainable revenue models for independent developers continues to be a big challenge. We expect developers to focus on two primary approaches. More and more advertiser spending will shift to mobile over time, as consumer usage continues to increase and targeting technology improves. Freemium apps have demonstrated their profitability but some have also come under criticism for allowing users to incur unexpected costs, such as through any in-app purchases that they wind up making.
Building Apps for Others.
internet economy to dominate exchange Manual
One area where developers are demonstrating success is building apps for other businesses. Some 70 percent of developers say they are profitable when doing contract work for others. Demand for app development is growing as industrial applications increase. Companies often do not have their own in-house developer talent and are willing to pay for functionality that can increase sales and profits. Developers are finding new opportunities in the Internet of Things. Some 25 billion new IoT devices including cars, heating and air-conditioning units, lighting systems, farm equipment, wearables, and security systems will come online from to , doubling the current number.
The long-anticipated, much maligned Internet-enabled fridge is actually a reality. Many of these objects are things on the move, such as cars and aircraft; they use mobile technologies, sensors, and software to stay connected.
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Once an object can represent itself digitally, it can be controlled remotely. The number of connected devices is growing fast. There were million of them in and The potential applications are endless. A few examples: airplanes that warn of component wear and potential failure; cars that automatically schedule their own maintenance; buildings with HVAC systems that can be controlled remotely; buses that update their performance against schedule in real time; tracking devices in farm animals that monitor food intake, temperature, and movements.
In almost every sector, the Internet of Things will vastly lower costs, improve safety, and heighten efficiency for consumers and businesses alike. Using Solair technology, manufacturers can monitor machine performance to optimize production, streamline maintenance plans, identify faults early, and reduce costs. The company provides an automated app platform that helps connect and automate machines and activities in such areas as fleet management, maintenance, and health and safety in six markets: retail, industrial machinery, smart buildings, energy, transportation, and health care.
Another example is OnFarm, an app that helps farmers increase crop yield and quality while reducing costs. OnFarm provides real-time data and an analytics dashboard with which farmers can monitor weather, soil moisture, fertilizer levels, insecticide applications, and the location of crops and equipment on the go. The app is being used by almond farmers and vineyard owners in the U.
An aircraft engine that monitors and reports operating data in-flight is one example; buses and trucks that continually report their location, speed, and other information is another. The EU had 52 million M2M connections in about a quarter of the global total , and these are expected to grow to million in 30 percent of the global total. The revenue numbers measured in the previous chapter are large. But they pale in comparison with what must be considered the real value of the mobile Internet: what all this activity is worth to the end user. Consumers worldwide are the big winners here. And the margin of victory runs into the trillions of dollars.
See Exhibit 4. The largest aggregate consumer surplus is in the U. See Exhibit 5. Consumers use their mobile devices for a wide variety of purposes. The most valued feature is still phone calls, but this is followed closely by Web browsing, searching the Internet, and e-mail. Mapping capabilities, social networking, and financial functions are also very popular.
See Exhibit 6. Large majorities would forgo most offline media the one exception is TV before forgoing mobile Internet access. Substantial majorities are also willing to give up such luxuries as fast food, chocolate, alcohol, coffee, and movies. See Exhibit 7. A significant minority of consumers are not willing to give up their mobile Internet access at any price.
I feel the Internet running in my blood. The Mobile Internet ecosystem is big and complex, involving thousands upon thousands of individual companies and organizations that interact with one another in countless different ways. Some of these entities are global in scale and reach, employing thousands of people and generating billions of dollars in revenue—telecommunications providers, device manufacturers, and software companies, for example.