May 222013

How much have you paid for your last home phone? Probably 10 euros, dollars, or whatever is your currency. It is likely that 20 years ago you would have paid a higher amount, even without taking into account the inflation. Still, imagine a world where you are the only phone owner, what would be the value of such phone? Probably zero, or even negative, since it would be a useless device that occupies space in your home.

Here we appreciate two concurrent and conflicting phenomena that are at the root also of API Economy. The first is the so-called Network Effect: the phone has a value that depends on the number of users of the (wired and wireless) phone network, the higher the number of phone owners, the higher the value of the phone; in essence the value of the phone depends on the size of its network. The second is that within network of users compatible goods tend to become commodities and loose value: now there are different phone operators and phone producers, and their network and devices are compatible – I can select AT&T, Sprint, TIM, or whatever other phone operator and I can buy any home phone, and still I can dial a call to anyone in the world. Therefore, the price of the device and of the access to the network has dropped because of the competition.

The essence is that to make profits in the telephony industry, one need to create larger networks of users of dedicated, and possible incompatible devices and services; this is why several ad-on services were created first on the landline phones: remote answering machines, caller IDs, possibility to re-route the phone calls. Also, this is why also different phone plugs were used in several countries: it could sometimes have been the case that a phone plug would cost more than the phone itself! Dealing with mobile phone and still looking at the basic phone services (voice and messages) the situation looks even more interesting: now with a mobile phone there is the possibility of using the data network to make calls and to exchange messages; Skype and WhatsApp are two remarkable example of this. Consequently, the profits made out of phone calls are becoming negligible and suppliers resort either to premium devices (like the iPhone) or to new services, possible creating close and somehow incompatible networks of users.

It is useful to spend a few words more on Skype. Skype is a crystal clear example of all these effects. In it we notice again this constant tension to enlarge the network (to create value), to close the protocol to the competition (to avoid commoditization), and still a move of competing products and system toward integration and interoperability. Skype originally worked only on a few platforms, now it has enlarged its networks to most computing devices, and with the acquisition of Microsoft has also allowed users of complementary products (like Hotmail) to use their credential to access their services; it has also lured the competition also granting users of Facebook to access its services. Clearly, there are competing products that are building up, such as Google Hangout; but it is not (yet) possible to make easily video calls from competing products using the Skype network. Still, it makes profits due to its large user base, not only via marketing and business intelligence, but also by offering premium services that still uses to differentiate itself from the competition.

Facebook and Instagram are also two very clear examples of these processes, as Israel Gat well discusses in his recent blog.

The lesson we learn is that at the root of API Economies there are these two diverging effects: network effects and commoditization, and to be successful, we need to create services that “conquer” a large network of users and become indispensable, or, at least, it is hard for the competition to substitute them easily.


Giancarlo Succi

Giancarlo Succi is a Senior Consultant with Cutter's Agile Product & Project Management practice. He has consulted with private and public organizations worldwide in the areas of Agile methods, software quality (measurements), software system architecting, design, development, IT strategy, and training for software personnel.


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