INCREASING RETURNS

What can be predicted…

…is the way in which networks enlarge small advantages, and then lock the advantage in. In the same way, initial parameters and conventions can quickly freeze into unalterable standards. The solidifying standards of a network are both a blessing and a curse–a blessing because the ad hoc agreement reduces risk, and thus sparks widespread progress, and a curse because those who own or control the standard are disproportionately rewarded.

But the network economy doesn’t allow the blessing without the curse. Microsoft’s billions are tolerated (more or less) because so many others in the network economy have made their collective billions on the advantages of Microsoft’s increasing-returns standards.

We forget how recent and sudden Microsoft’s prominence is. Microsoft is a textbook example of Metcalfe’s law (“The value of Windows increases exponentially as its users increase arithmetically”) and the law of increasing returns (“The more who use NT, the more attractive NT becomes”). Microsoft also illustrates the third corollary of increasing returns: how small signals can suddenly become booms.

 

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-- KK