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Apple’s iPhone Benefits from Network Externalities

Apple controls about 40 percent of the United States’ smartphone market and enjoys a 15 percent edge on its next closest competitor – Samsung.  While the iPhone certainly is not ubiquitous, its position in the market can be enhanced through network externalities.

The iPhone’s popularity is mostly due to its inherent value.  Being the fastest smartphone on the market, offering a long battery life, and better photo quality have already given Apple an advantage over other smartphone companies.  This advantage is necessary in order for Apple to benefit from network externalities.

Applications unique to the iPhone like Face Time and group messaging are examples of direct network externalities.  Defined as when “consumers value a product more, the greater the number of consumers that use the product,” (Martin 306) direct network externalities are only beneficial when a significant portion of the population is able to utilize the application.  Without Apple’s high market share levels, idiosyncratic applications would detract from the iPhone’s value.

Apple has also made attempts to capitalize on indirect network externalities – or, when “consumers value a product that serves as a platform more, the greater the availability of complementary products designed for compatibility with the platform standard” (Martin 306).  The iPhone’s robust nature makes it easy to integrate it with other complementary products.  Cooperation with Nike has helped to make the iPhone a pedometer.  Car stereo systems are also being created in order to facilitate the iPhone and other Apple products.  While companies like Samsung and HTC offer comparable products to the iPhone, they are not in Apple’s position to benefit from network externalities.

One Comment

  1. Complementary products are likely key here, rather than speed and so on. W&L’s computer science program offers a course in iPhone programming; the array of apps is huge, and much bigger than that of rivals. We see the same thing when we look at MS-DOS (and later Windows): once Microsoft landed the contract for the original IBM PC, tons of developers wrote programs for it. Apple hung on (and now “porting” software is less of an issue, but still an issue) but rival operating systems in the PC world vanished (CP/M). Game consoles are similar, why buy one unless there are lots of games available? And the more that are available, the less the incentive to write ones for rival consoles. Lots of examples, but the iPhone is certainly a good one.

    So the followup question: who owns the operating systems or software platform for Samsung? other phones? What have they done (or failed to do) to get others to write software? [Note Blackberry just declared a huge loss, and laid off a large block of their labor force – is anyone writing apps for them, or did they have a “closed” operating system that precluded that?]

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