Article 1- Network Effect (opinion by Frank Hayes ...



Article 1: Network Effect with Electronic Health Records (EHR systems) in Health Care Industry.

Article 2: Lock-in Strategy of MSN Messenger 7? (Also touches on the battle between Applications written with Open Source vs. Proprietary software.)

Article 3: Co-opetition in the online world

Article 4: Network Effect- understanding the success of hotmail.

My discussion is captured below each article in blue.

Article 1- Network Effect (written by Frank Hayes, Computer World’s Sr. News Columnist, Aug 29th 2005)

I work for a hospital management company in the Midwest that works with 30 very small rural community hospitals. Not one of our hospitals is ready for electronic health records. They are not even close to giving up paper. I guarantee you there are more hospitals that do not have EHR than those that do."

This network manager who wrote to me is right. When I said a few weeks back [QuickLink 55837] that "hospitals have made the transition over the past decade" to EHR, I was wrong. True, many large health care organizations have put EHR in place. But the rest of the health care world has a big challenge ahead.

Wait, check that: A better way to say it is that because many doctors and small hospitals aren't using EHR, everyone in health care faces a big challenge.

Why? It's the network effect. Remember Metcalfe's Law: The more users who can communicate with one another on a network, the more valuable the network is.

Sure, EHR can save some money internally for each organization that implements it. But the big value comes when lots of organizations can exchange medical records efficiently.

And the lack of widespread use of EHR actually adds cost for organizations that use it. Every time one of those small community hospitals sends a patient to a big health care organization with actual paperwork, that paper has to be converted to electronic records. Then the EHR has to be printed on paper again for the patient's file when he goes back home.

That means we can't treat EHR as a competitive advantage that we keep for ourselves. We have to spread it around as widely as possible. Otherwise we can't realize the biggest benefits -- including the largest cost savings.

That's not unique to EHR. For example, no company can get maximum advantage alone from RFID; everyone on the supply chain has to use it. And Internet retailing only works when all customers and suppliers use the same Web protocols.

But that's not the way we're used to thinking about IT's benefits. And it's not the way we usually sell new IT initiatives to top management. It's one thing to say, "We need to adopt this technology to get an advantage over the rest of our industry." It's quite another to argue, "We need to get the rest of our industry to adopt this technology so we can maximize our benefit from it."

In the case of EHR, it's especially sticky: These are patients, not products, so there's no chance of a Wal-Mart-style "adopt this or we won't buy from you" ultimatum.

But big health care organizations still have a big interest in getting small hospitals, clinics and medical practices on board with EHR. It's the only way to get a big-time payback from their own EHR spending.

Making that happen won't be easy. The costs of software, hardware, implementation, training and running the systems aren't trivial. Distributing less-expensive EHR software like Vista-Office is a start, but more will need to be done.

For big health care players, will that mean contributing improvements to the Vista-Office software? Partnering with small hospitals to train IT and medical staff? Donating equipment? Lobbying for the health care equivalent of the Rural Electrification Act?

I don't know. But short of a real push, big health care organizations won't get the ROI they want from EHR. And as that network-manager reader put it, "those that do not have EHR will not be ready in the next few years -- or the next 10 years."

Incidentally, in response to readers who asked where to find Vista-Office EHR and the open-source OpenVista, try the Vista-Office Web site (vista-) and WorldVista (). OpenVista is available now; Vista-Office EHR is still scheduled to be out this month.

My Comments:

This article is clearly illustrates the class discussion on Network Effect. In class, we studied that the “Value to me directly depends on number of adopters”. Similarly here, the true value in terms of cost saving to the hospitals accrues only when many other hospitals adopt it.

Article 2: MSN Messenger 7: consolidating Windows' lock-in strategy? (Written by Stephanie Reippe for OS News, Jan 15, 2005)

What happens when the corporation anybody seems to love to hate, namely Microsoft, release a killer app and of makes it free (as in dollars), but, of course, keeps its source jealously closed? And worse than that, use it to maintain a strong lock-in to the Windows platform?

Microsoft's MSN Messenger is a bulky, overbloated messenging application. Its new beta (version 7) [] makes things even worse: it now allows you to 'nudge' the IM window of your correspondent (it shakes his/her IM window for a period of one or two seconds). Other new features allow users to send and receive annoying-as-Hell full screen Flash sequences, an easy white board integration, background bitmap sharing and of course, a good lot of merchandized artwork (the usual obnoxious emoticon pack plus new contents for every feature I just described). It has even its own blogging and photo sharing system. Young people love it.

Of course, the older MSN 6 features are still there. A big 96x96 pixel display picture (MSN variation of the avatar or buddy icon), very good webcam support (plug & play that really works), attractively themed windows. Other features include magical file transfers (magical in the sense that thanks to uPNP, file transfer actually work, even if you're heavily firewalled/NAT'ed), a game system (from a basic and free tic tac toe to more evolved, for-money games) that works far from flawlessly and pretty bad audio support, far behind the current leader's (Skype) abilities.

Young people in European countries just can't live without MSN. Here, anyone in his teens or twenty-something has its MSN Messenger account (we usually call it MSN for short here, since nobody even knows that MSN is an ISP in the USA). Just give me your MSN and we'll talk about it tonight' is a sentence you'll hear pretty everywhere, from elementary school to universities. Non-'MSN'-users are being more marginalized everyday. Just as people (like me) who don't want a cell phone are.

What does it have to do with Free and Open Source Software, you may ask? Well, the idea behind this rant is simple, if not simplistic. You'll often read in this column, on Slashdot and on various other sites that 'heavy' software (more often cited examples are Microsoft Office, Adobe Photoshop & Illustrator or the Macromedia suite) keep people from using Free operating systems (i.e. any Linux or BSD flavor running KDE or GNOME). That's true, but that's far from being the complete story.

Can you connect to the MSN Messenger network using Free operating systems? Sure you can. There is Gaim [], there is Kopete []. Are they attractive? No, they aren't. Their interfaces are terrible. Moreover, all you can do with them is write basic IMs. Bye bye overbloated and stupid nudge and Flash sequences. Just the text ma'am. Display picture? Well, it sort of works, but that's all. File transfers? I can swear that you're a lucky guy (girl) when it works. Usually it doesn't, resulting in embarrassing 'Sorry mate, I'm using Linux, you know and, well, could you mail me this picture instead?'.

And boy are they ugly. Compare a MSN Messenger 7 chat window and a Gaim window. Gaim (or Kopete for that matter) is so austere that the comparison looks unfair even to people who, like me, usually hate themed windows and flashy-for-the- sake-of-being-flashy interfaces.

Will it keep me from using other OSes than Windows? Certainly not. Will it keep young people from using them? You bet. And that's the point of this long rant. Office and creative applications, are undoubtely important tools for keeping Windows' (and to a lesser extent, Mac OS X's) lock-in on the Desktop. But I can't understand why every Free and Open Source advocate basically snobs IM's. Gaim and Kopete are just not good enough. I mean that their target public (i.e. young people) just won't care to use it (I understand that some people, me included, can live with them. We just aren't the target public).

We have [], we have FireFox []. Both are doing well in their respective domains. Why do we keep thinking that Gaim's so '1999-2000' tools are good enough? They aren't and it's my opinion -- and I'd really like it to be false -- that it's a major problem to address in the next few months in order to increase the admission of Free and Open Source software on the desktop. A problem that has to be addressed very, very quickly, before it becomes even worse.

My comments: This article touches on two important course concepts. One is the concept of lock-in and how Instant Messenger has always been seen as application with Lock-in built in it. While this article makes a compelling case that this is another sinister plan from Microsoft, things have already changed in the Instant Messenger world. Microsoft has partnered with Yahoo IM to allow users to message people across the two services.

The other course concept is Open Source vs. Proprietary. This article shows that because of ‘lack of funds’ and a ‘monetizing model’, open source apps are usually inferior to proprietary ones.

Article 3: ‘Co-opetition is gaining acceptance. (by Jeff Pelline in CNET , 1998)

The idea of "coopetition," which refers to a business cooperating with its competitor, is not new. But high-tech companies--including the likes of Microsoft, Netscape, and Apple--increasingly are embracing the strategy as they attempt to grow in cutthroat markets.

Most experts say such collaboration is occurring because of the rapid convergence of many high-tech industries, brought on by deregulation and the advent of new technologies. As software companies such as Microsoft expand onto the Internet, it has become possible to compete and cooperate with others at the same time.

However, such deals are raising controversy.

In the latest example, Netscape is turning to "coopetition" (a term coined by Novell founder Ray Noorda) as it gears up to become a full-fledged Internet "portal" site later this year, competing with Yahoo, Excite, Infoseek, and America Online, among others. That means the company is cutting deals with some of the same search engines and Net directories that it will be competing against.

Many of these deals, such as the one with Infoseek, expire on April 30, which puts Netscape in the position of negotiating with a would-be competitor. Last week, Netscape executives used "coopetition" to describe the strategy they are pursuing and said they expect to announce new alliances with search engine and e-commerce partners in one to two months.

Other examples of "coopetition" abound. Among them include the following:

• Microsoft continues to build closer ties to Apple, its archrival in the PC operating-system market. Two weeks ago, Microsoft unveiled plans for unifying Java applications on Windows and Macintosh systems, an announcement that came seven months after the software giant agreed to invest $150 million in the computer maker.

• Last fall, America Online and Microsoft agreed to team up on online offerings. The world's largest online service began carrying Slate, Microsoft's online magazine. Although the Microsoft Network and AOL are fierce competitors, the two apparently are willing to work together to boost readership to their sites. Web aggregation sites work on the same principle.

• Smaller Internet service providers, such as Whole Earth Networks, increasingly find themselves turning to "coopetition" with larger backbone providers. The so-called peering agreements allow them to provide connectivity to their customers.

Analysts expect the trend--"working with the enemy," as some describe it--to continue. The term "coopetition" is being thrown around freely in "executive-speak," just as the term "bandwidth" is now commonly used to describe a person's or group's ability to handle increased workload at the office. For example, the AltaVista Web site now lists 467 entries under the word "coopetition."

Two years ago, Adam Bradenburger, professor of business administration at the Harvard Business School, and Barry Nalebuff, a professor at the Yale School of Management wrote a book on the subject. It became a Business Week and New York Times best-seller.

The idea, as the authors explain it on their Web site, is as follows: "Some people see business entirely as competition. They think doing business is waging war and assume they can't win unless somebody else loses. Other people see business entirely as cooperative teams and partnerships. But business is both cooperation and competition. It's coopetition."

Coopetition deals aren't just raising controversy among customers, but among regulators as well.

Microsoft's $150 million investment in Apple is a case in point. The deal currently is being investigated by the Justice Department on antitrust grounds. In addition, some Apple loyalists have mixed emotions about the collaboration, worrying that ultimately it may stifle the Mac maker. On they other hand, others see the cash infusion as a needed financial shot in the arm.

Coopetition also can spark lawsuits. For example, fiber-optic network provider Williams Communications said today that it has sued WorldCom for allegedly failing to honor its promise to sell capacity on WorldCom's network. The telco's acquisition binge to build its backbone also has drawn regulatory scrutiny. WorldCom declined comment.

Last April, Whole Earth Networks and UUNet Technologies got into a dispute about Net connection fees. Whole Earth, along with more than a dozen ISPs, were fighting a UUNet plan to possibly charge them fees or terminate agreements altogether. The companies later agreed to continue their interconnection agreement. Last week, GST Communications agreed to buy Whole Earth Networks for $9 million in cash and assumed debt.

My comments: This is an old article but I thought was an excellent article on the course concept of Co-opetition. It shows how the old concept of rivalry is breaking down in the internet world. It is interesting to note that this even before the bubble burst, firms were heavily into co-opetition. In fact in 2005, it has become more prevalent with tie up between Microsoft and Real Networks.

Network Effects: (Fast Company, Online Magazine, September 1999)

How do Web companies get so big so fast? By embracing the most important strategic mind flip of the 21st century. A world governed by networks is rewriting the rules for how you build companies, market products, and create value.

The startup opened its virtual doors to customers on July 4, 1996. The date was a great choice in terms of corporate symbolism, but a terrible one for creating buzz. Most media outlets operate with skeleton crews over Independence Day, so the launch generated almost no press coverage. And there was no ad campaign to pick up the slack. Of the $300,000 in seed capital that the company had received, less than $50,000 was targeted for promotion. "There wasn't even a marketing budget," remembers Steve Jurvetson, a managing director of Draper Fisher Jurvetson (DFJ), the venture-capital firm that provided the seed money.

So much for a virtual "shot heard 'round the world." The launch of the world's first free Web-based email service had more the effect of a wet firecracker. Then a funny thing happened: Customers began signing up. John Fisher, another DFJ managing director, was at a trade show with one of the startup's founders the week of the launch. "His beeper would go off every 30 minutes," Fisher says, "and there would be reports of several thousand more sign-ups. It became immediately clear to us that we had a tiger by the tail."

The first markets to light up were universities -- places with ".edu" domains. A user would sign up at, say, Cornell. A day later there'd be a half-dozen users at Cornell. The next day, there'd be 100. By the end of the first week, there'd be 1,000. The service would spread to another university, and the process would repeat itself. Then word of the service began spreading around the world. Within three weeks of the first user from India signing up, 100,000 additional users from that country came on board. "It was like a miracle was unfolding before our eyes," says Jurvetson, a boyish 32-year-old whose voice still conveys the excitement of those early days. "At one board meeting, we'd see, maybe, Sweden show up for the first time. At the next month's meeting, there'd be a huge number of users from that country."

By Christmas 1996, less than six months after the launch, the new company had 1 million registered users. In the entire history of subscriber-based media, nothing had grown so large, so fast. The company's performance was unprecedented. That it happened with a marketing budget of less than $50,000 was simply unbelievable.

The startup, of course, was Hotmail, a company that has become a legend among Silicon Valley entrepreneurs for its fast-forward approach to attracting customers and creating value. By Christmas 1997 (less than 18 months after its launch), Hotmail had signed up 12 million subscribers. A few days later, on December 29, founders Sabeer Bhatia and Jack Smith sold the company to Microsoft for $400 million in Microsoft stock. Today, with 50 million registered users, Hotmail is the largest Web-based email service on the planet.

Not surprisingly, the investment in Hotmail touched off an inferno at DFJ, which has done 57 Internet deals -- more than any other independent VC outfit. "We want to invest in companies where we can light a match and start a fire," says Jurvetson. And apparently word did spread like wildfire. When DFJ recently set out to raise a new pool of money, investors offered to provide three times as much as it was looking for. It decided to limit the size of the new fund to $180 million. (Its third fund, a $50 million pool established in 1995, is now reportedly worth $760 million.)

It's easy to grow weary of Web hype. Pick an industry, and you're almost guaranteed to encounter a pack of twentysomethings with a few Macs and an Internet connection who are vowing to start a revolution. You'll also encounter more buzzwords than the mind can process. Still, there's no denying that the Internet economy works by a different set of rules than the old economy. When, in business history, have so many companies generated so much value so quickly? Hotmail is one eye-opening case among many. Yahoo!, a company that's still barely five years old, has 65 million registered users and a market value of $35 billion. EBay, which went public in September 1998, now has 3.8 million registered users -- and a market value of $17 billion. And don't forget RealNetworks, , and E*Trade -- three young Web companies with a combined market value of $31 billion.

The stories behind these companies involve different missions, different markets, different business models. But they all illustrate the power of network effects. In a sea of new-economy buzzwords, network effects is the one new idea by which more and more companies will chart their course. Part economics, part strategy, part ideology, network effects may be the defining business mind flip of the 21st century.

Scott Reamer thinks so. An athletic 28-year-old analyst with SG Cowen, Reamer (whose official title is director of Internet research) is a new breed of Wall Street power player -- a financial wizard whose job is not just to evaluate stocks, but also to explain the logic of value creation itself. What Reamer calls his "Internet first principles." There are four of them, and they are at work in every company he tracks.

To Reamer, what matters most is the presence of network effects. That's why he loves America Online, a company that he's followed since 1996 -- and that's now worth a stunning $125 billion. "The real beauty of AOL's service is that, like any network, its value grows to the nth power of the number of people who use it. A telephone network is meaningless with 1 phone on it. With 2 phones, it begins to be useful. With 1,000 phones it's important. With 100 million, it's incredibly important. AOL works the same way. The value of its service increases with every single person that joins."

If you understand how the partners at DFJ decide on which companies to fund, and you understand how Scott Reamer determines the value of the companies that make it to Wall Street, then you'll begin to understand the mind-bending logic of network effects.

You've Got Hotmail

In Web circles, the Hotmail story is almost as well-known as the service itself. But, like so many Internet takeoffs, Hotmail almost didn't get off the ground. Founders Bhatia and Smith had been turned down by something like 21 VC companies before they met Steve Jurvetson. Even he wasn't all that impressed by the startup team's big idea for a company called JavaSoft. But one feature of their plan -- free Web-based email -- did catch his eye. The talks heated up, and JavaSoft became Hotmail.

Then came a meeting with Tim Draper, 41, DFJ's founding partner. It was the first time that Draper had met with Bhatia and Smith. Draper was enthusiastic about the company, but he was adamant about one small detail: He wanted to put a hot link at the bottom of every email with a message, "P.S. I love you. Get your free Web-based email at Hotmail." Clicking on the link would bring the message recipient to Hotmail's site, and let that person sign up for the service immediately. That idea almost blew the deal apart. "The founders thought that it was like Spam," recalls Jurvetson. "And it's true: Until Hotmail tried it, the contents of email were always considered completely private."

Which is why Bhatia and Smith not only hated Draper's idea but felt it was contrary to the spirit of the Internet. "They fought me for quite a while," Draper says, remembering that initial meeting. "Then, finally, they came back and said, 'Okay, we'll do it. But no 'P.S. I love you.' " Draper's bemused smile turns into an oversized grin. "Then Hotmail just started to spread."

And it spread unlike anything DFJ had ever seen. "We had to keep asking ourselves, 'Is this a fluke, or is it something important to think about?' " Jurvetson recalls. "After the Microsoft buyout, the magnitude of the value Hotmail had created hit us in the face. We actually thought that the founders should have held out and not sold. But in the end, they really wanted to sell."

Around the time of the Hotmail sale, Netscape, another pretty successful Web startup, asked Jurvetson to contribute to its internal newsletter, "The M-Files." The assignment was twofold: First, to write about new companies in the DFJ portfolio that were using Netscape technology. Second, to examine what those companies were doing that was unique and to draw out some lessons. "That was the first time that I thought to myself, 'How can I describe why Hotmail is special?' " Jurvetson wrote something and passed it to his partners for comments. In a meeting with Draper, the two financiers began trying to coin a phrase that would describe the phenomenon that they had helped create. They tried terms like "pyramid marketing," "geometric marketing," and "tornado marketing."

Then they came up with a term that stuck -- "viral marketing." The email service had spread around the world with the ferocity of an epidemic. By passing along emails with a clear (but inoffensive) marketing message, current users were infecting potential users. And the rate of infection increased rather than decreased as time went on. Forget diminishing returns; Hotmail was enjoying increasing returns.

Jurvetson went home to his wife, Karla, a psychiatrist, and began poring over her medical books. "I read that a sneeze releases 2 million particles," he says, "and I really started thinking about the idea of infection for the first time. A sneeze is only dangerous when there's a crowd around. A sneeze on the Internet, however, can infect millions of people scattered across the planet. It's as if Zeus sneezed: How many people would catch a cold?"

Suddenly, the principle behind viral marketing seemed so easy to understand. In this new world, companies don't sell to their customers. Current customers sell to future customers. In exchange for a free service, customers agree to proselytize the service. Because recipients of Hotmail messages are almost always friends, relatives, or business acquaintances of the sender, the marketing message is that much more powerful. Each email carries an implied endorsement by someone who the recipient knows. (See "Four Laws of Viral Marketing," page 216.)

Hotmail's performance was a revelation to the partners at DFJ. And if there were any doubts that its success could be replicated, they were laid to rest with the success of Four11. Six months before taking a 15% stake in Hotmail, DFJ had invested $800,000 in Four11 -- a provider of free Internet directory services. Though Four11's growth was not as explosive as Hotmail's, it did exhibit all the symptoms of a viral-marketing success story. In the end, Yahoo! acquired Four11 for $93 million of Yahoo! stock. In less than two years, with a total of less than $5 million invested in Hotmail and in Four11, DFJ walked away with $200 million. "We were on the lookout for viruses from that point on," says John Fisher. "In Tim's case, it almost became a sine qua non for investing in a company." Adds Jurvetson: "I can't think of any consumer Internet company that we'd consider that doesn't come with a viral-marketing element."

My comments

This is an interesting article that traces the success of hotmail and shows how its founders intuitively understood the power of ‘network effect’ in the online space. It also shows that the speed with which ‘network effects’ kick in is what makes the internet world a different from the old economy. This article is clearly illustrates the class discussion on Network Effect. In class, we studied that the “Value to me directly depends on number of adopters”. This is what led to the immense value of hotmail as it scaled up users.

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