The role of network externalities in interconnected industries : a mobile communications case study

Abstract

Network externalities predict markets should tip in favor of a dominant player. However several networks in the ICT economy are not allowed to run their course towards a 'winner-takes-all' scenario where only the strongest survive. There is a gap in the literature regarding the market development of interconnected platforms that make up most of today's network industries. Research on the UK mobile communications industry shows that interconnectivity modifies the mechanism of network externalities. Inter-firm network externalities are observed whereby the subscriber acquisition of a firm is effected by the industry's total installed base and the respective sizes of competitors' networks. The analysis uncovers new knowledge on critical mass in interconnected networks. Critical mass occurs in a concurrent time frame for the different networks. A marginal lag is observed which relates to the volume of subscribers on each network. Isomorphic strategies are identified in the mobile communications industries in the UK and Germany. Innovations in the strategic process are copied and strategic action becomes more homogenous over time. The combination of network externalities, critical mass, and isomorphic strategies allow mobile communication markets to grow rapidly, whilst driving market shares towards convergence and preventing marketing tipping. The interconnectivity of the industry lies not just at the level of the technical platforms but also at the level of strategic processes, the consumer market and the interdependent revenue structures. The research findings conceptualize the process dynamics of market development in network industries as a new integrative theoretical and practical phenomenon.