Externality

A network externality is the change in benefit that a user of a platform obtains as a result of more people joining said platform. For example: the telephone. If there is only one telephone user, then it isn’t very useful for contacting friends or family. He can’t use it to look for a job or get a pizza delivery. But, as more people have phones, they can be used to call family, friends and services. This increase in the benefits as more people use telephones is a network externality.

Adobe: Adobe relies on network externalities through the standards it created, namely flash player and pdf. If many people agree to use the pdf format, then software for creating and editing them is necessary (Adobe Acrobat). If many people use flash, web sites will want to use the software to create video, games, and interactive sites in Flash (Adobe Flash Professional). Adobe earns revenue by selling Adobe Flash Professional and Acrobat. To stimulate adoption of its standards, Adobe offered the flash player and pdf (and its reader) for free to users. As usage of standards increased, it became more attractive for content providers (web sites, game developers, etc.), who bought more of Adobe’s products.

Apple: Vertical integration is an important part of its business model. They control the hardware, operating system, and a lot of the software that goes into its products. Though Apple has no more than 8% of market shares of PC market, 35% of overall operating profit is attributed to vertical integration. However, Apple allows third parties to create software for its computers and offers apps for its iphone and ipad. These devices are platforms for developers to create software for which they pay apple licensing costs, Apples source of revenue. So, Apple needs to attract developers by providing them with a large population of consumers. Apple’s itunes is another example: artists offer their content for download through itunes and Apple keeps a fraction of the sales revenue. The more...