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'''Acrux''' ([[alpha (letter)|α]] Crucis) is a [[star]] in the [[constellation]] [[Crux]], the Southern Cross. Since the Southern Cross is roughly 60 degrees below the [[celestial equator]], Crux is only visible south of the [[Tropic of Cancer]] and therefore didn't receive an ancient proper name; "Acrux" is simply a combination of the A in Alpha plus Crux. Acrux has a [[stellar magnitude]] of 0.77, and is the twelfth brightest star in the sky. It is the southernmost first magnitude star, just beating out [[Rigil Kentaurus]] (α Centauri).
The '''network effect''' means that a good or service is such that the value of the good or service to a potential customer is dependent on the number of customers already owning that good or using that service. Equivalently, it means that the total value of a good or service that possesses network effects is roughly proportional to the square of the number of customers already owning that good or using that service.
Acrux is a [[trinary star]] located 320 light years from the solar system. Only two components are visually distinguishable, α<sup>1</sup> and α<sup>2</sup>, separated by 4 [[arcsecond]]s. α<sup>1</sup> is magnitude 1.33 and α<sup>2</sup> is magnitude 1.73, both hot [[stellar classification|class B]] (almost [[stellar classification|class O]]) stars, with surface temperatures of about 28,000 and 26,000 Kelvin respectively; their respective luminosities are 2,500 and 1,600 times that of the Sun. α<sup>1</sup> and α<sup>2</sup> orbit over such a long period that motion is only barely seen. From their minimum separation of 430 [[astronomical unit]]s, the period is at least 1500 years, and may be much longer.
One consequence of a network effect is that the purchase of a good by one individual indirectly benefits others who own the good - for example by purchasing a [[telephone]] a person makes other people's telephones more useful. This type of side effect in a transaction is known as an [[externality]] in [[economics]], and externalities arising from network effects are known as '''network externalities'''.
α<sup>1</sup> is itself a [[spectroscopic binary]] star, with its components thought to be around 14 and 10 times the mass of the Sun and orbiting in only 76 days at a separation of about one astronomical unit. The masses of α<sup>2</sup> and the brighter component of α<sup>1</sup> suggest that the stars will someday explode as [[supernova|supernovae]]. The fainter component of α<sup>1</sup> may survive to become a massive [[white dwarf]].
== Network effect business models ==
Another class B subgiant lies 90 arcseconds away from triple Acrux and shares Acrux's motion through space, suggesting it may be gravitationally bound to Acrux. However, if it is indeed located near Acrux, it is under-luminous for its class. It is probably just an optical [[double star]], most likely lying over twice as far away from the solar system as Acrux.
Network effects were used as justification for some of the [[business model]]s for [[dot-com|dot-coms]] in the late [[1990s]]. These firms operated under the belief that when a new market comes into being which contains strong network effects, firms should care more about growing their market share than about becoming profitable. This was believed to be rational because market share will determine which firm can set technical and marketing standards and thus determine the basis of future competition. A good example of this strategy was that deployed by [[Mirabilis]], the [[Israel|Israeli]] start-up which pioneered [[instant messaging]] (''IM'') and was bought-out by [[AOL]]. By giving away their product ([[ICQ]]) [[Free_as_in_beer|for free]] and preventing [[interoperability]] between their client [[software]] and other products, they were able to corner the market for instant messaging. Because of the network effect, new IM users gained much more value by choosing to use the Mirabilis system (and join its large network of users) than they would using a competing system. As was typical for that era, the company never made any attempt to generate profits from their dominant position before selling out.
[[Category:Stars]]
Network effects become significant after a certain subscription rate has been achieved, called critical mass. At the critical mass point, the value obtained from the good or service is greater than or equal to the price paid for the good or service. As the value of the good is determined by the user base, this implies that after a certain number of people have subscribed to the service or purchased the good, additional people will subscribe to the service or purchase the good due to the positive utility / price ratio. Until this point has been achieved, however, only [[diffusion (business)|early adopters]] will subscribe.
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The increasing number of subscribers does not continue indefinitely however. After a certain point, the network becomes either congested or saturated, stopping future uptake. Congestion occurs due to overuse. The applicable analogy is that of a telephone network. While the number of users is below the congestion point, each additional user adds additional value to every other customer. However, at some point the addition of an extra user exceeds the capacity of the existing system. After this point, each additional user decreases the value obtained by every other user. In practical terms, each additional user increases the total system load, leading to busy signals, the inability to get a dial-tone, and poor customer support. The next critical point is where the value obtained equals the price paid again. The network will cease to grow at this point, and the system must be enlarged. The [[congestion point]] may be larger than the [[market size]].
Network effects are commonly mistaken for [[economies of scale]], which result from business size rather than interoperability (see also [[Natural monopoly]]). To help clarify the distinction people speak of demand side v.s. supply side economies of scale. Classical economies of scale are on the production side, while network effects arise on the demand side. Network effects are also mistaken for [[economies of scope]].
== Examples ==
There are very strong network effects operating in the market for widely-used computer software. Take for example [[Microsoft Office]]. For many people choosing an office suite, a prime consideration is how valuable having learned that office suite will prove to potential employers. That is, since learning to use an office suite takes many hours, they want to invest that time learning the office suite that will make them most attractive to potential employers (or consulting clients, etc).
Similarly, finding already-trained employees is a big concern for employers when deciding which office suite to purchase or standardize on. The lack of cross-platform standards results in a situation in which one firm is in control of almost 100% of the market.
However, network effects need not lead to market dominance by one firm, when there are standards which allow multiple firms to interoperate, thus allowing the network externalities to benefit the entire market. This is the case with [[x86]]-based [[Personal computer|PC]] hardware, where there are extremely strong market pressures to interoperate with pre-existing standards, but in which no one firm dominates in the market. The same holds true for the market for [[long-distance telephone service]] within the [[United States]]. In fact, the existence of these types of networks makes it very hard for one company to dominate the market, as it creates pressures which work against one company attempting to establish a proprietary protocol or to even distinguish itself by means of product differentation.
In cases where the relevant communication protocols are under the control of a single company, however, the network effect can give the company monopoly power. The [[Microsoft]] corporation is widely seen by computer professionals as maintaining its monopoly through these means. One observed method Microsoft uses to put the network effect to its advantage is called [[embrace, extend and extinguish]].
== Network effects and technology lifecycle ==
If an existing technology or company whose benefits are largely based on network effects starts to lose market share against a challenger such as a [[disruptive technology]] or [[open standards]] based competition, the benefits of network effects will reduce for the incumbent, and increase for the challenger.
In this model, a [[tipping point]] is eventually reached at which the network effects of the challenger dominate those of the former incumbent, and the incumbent is forced into an accelerating decline, whilst the challenger takes over the incumbent's former position.
==Related articles==
* [[Metcalfe's law]]
* [[Reed's law]]
* [[Path dependency]]
* [[Tipping point]]
* [[Betamax]]
* [[Vendor lock-in]]
* [[Technology lifecycle]]
* [[Business model]]
* [[List of management topics]]
==External links==
* [http://wwwpub.utdallas.edu/~liebowit/palgrave/network.html Network Externalities (Effects) by S. J. Liebowitz and Stephen E. Margolis]
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