Six Strategies for Overcoming “Chicken and Egg” Problems

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Chris Dixon has a great post up about the "chicken and the egg" problem, which refers to the challenge of achieving critical mass in a market where the network effects are strong. The telephone is the classic example — it's only valuable if other people also have one, and becomes more valuable the more people who use it. So how do you convince the first few people to adopt the technology? Here are his six strategies:

1. Signal long-term commitment to platform success and competitive pricing.   When Microsoft launched the original Xbox,  they made a big deal of publicly committing to spending $500M promoting the platform, thereby signalling that they were fully committed for the long haul and giving comfort to 3rd party game developers.   Another way to give comfort that your platform isn’t going away is to open source it – this way third parties know that even if the company stops supporting the product, independent developers can continue to do so (e.g. Google Android and Chrome).  Open sourcing also gives comfort that the company isn’t going to raise prices once they’ve reached critical mass.

2. Use backwards and sideways compatibility to benefit from existing complements. Microsoft of course has used backward compatibility very successfully for decades with DOS and then Windows, as have many game console makers.  In our paper we argue that the successful early bill pay (”bill presentment”) companies provided backward compatibility by sending snail mail checks to merchants who had yet to sign on to their electronic platform.

Virtual machines and Bootcamp gave Apple’s hardware some sideways compatibility with Windows.  Sun’s invention of Java could be seen as an attempt to introduce sideways compatibility between its shrinking server market and its competitors (Windows, Linux) by introducing a new, cross-platform programming layer.

3. Exploit irregular network topologies. In the last 90s, most people assumed that dating websites was a “winner take all market” and Match.com had won it, until a swath of niche competitors arose (e.g. Jdate) that succeeded because certain groups of people tend to date others from that same group.  Real-life networks are often very different from the idealized, uniformly distributed networks pictured in economics textbooks.  Facebook exploited the fact that social connections are highly clustered at colleges as a “beachhead” to challenge much bigger incumbents (Friendster).  By finding clusters in the network smaller companies can reach critical mass within those sub-clusters and then expand beyond.

4. Influence the firms that produce vital complements.  Sony and Philips, the companies that oversaw the successful launch of the compact disc technology in the early 1980’s, followed the CD launch with the introduction of the digital audiotape (DAT) in 1987. The DAT offered CD sound quality and, in a significant improvement over CD technology, it also offered the ability to record music.  Despite these improvements, the DAT never gained significant consumer adoption and ended as an embarrassing failure for Sony and Philips.  DAT failed because Sony and Philips failed to reassure record companies who were concerned that the recording capabilities of DAT would lead to widespread piracy.  Sony finally reached an anti-piracy agreement with record companies in 1992, but by that time consumer expectations for the DAT platform were dampened sufficiently to doom the platform.

On the other hand, when Sony and Philips launched the CD, they succeeded because they did a significantly better job influencing complement producers. Most importantly, they addressed the record companies’ primary concern by making CDs piracy resistant (or so it seemed at the time). In addition, Philips was able to influence Polygram, a major record label, to release music in the CD format because Philips owned a 50 percent stake in Polygram. Finally, Sony and Philips provided the record companies with access to their manufacturing technology and plant in order to ensure an adequate supply of complementary products. As a result, nearly 650 music titles were available in CD format when the first CD players were released and the CD format went on to become the most popular music format.

5. Provide standalone value for the base product.  Philips introduced the videodisc player (VDP) in 1979 as a competitor to the VCR. VDPs had slightly better picture quality than VCRs and had potentially lower hardware and software costs, owing to a simpler manufacturing process. However, the VCR had a 3-4 year head start on the VDP and had already developed an installed base of over one million units.

Providing a stand-alone use is the strategy that VCR producers used to achieve a successful launch and avoid fighting the difficult chicken and egg startup problem. Unlike the VDP, the VCR offered the ability to time-shift television programming. In fact, when the VCR was launched this was the only application available because the market for pre-recorded videocassettes had not yet developed. The standalone value for the VCR “time-shifting television programming” was sufficiently strong to get over a million people to purchase the product in the first 3-4 years after its launch. This installed user base of the VCR as a base product was sufficient to entice entrepreneurs to develop a market for pre-recorded videocassettes as complementary products in the late 1970’s. The complement-based network effect that resulted improved the value of the base product, increased sales velocity for the base and complementary products, and ensured that the VCR would be a common feature in most American homes.

A good modern example of this would be del.icio.us, which had stand alone value by storing your bookmarks in the cloud, and also had network effects with its social features.

6. Integrate vertically into critical complements when supply is not certain.  To overcome the chicken and egg problem, companies must find a way to ensure an adequate supply, variety, and quality of complementary goods. By vertically integrating into the complement product as well as the base product, a company can attempt to ensure an adequate supply of both goods.  Nintendo is the leading developer of games for its consoles, and Microsoft and Sony fund many of their most popular games.

Vertical integration is risky – as witnessed by the Apple computer in the late 80s and early 90s. By remaining tightly integrated, Apple precluded market competition from providing the necessary variety of price-competitive complements and base products.

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Book Notes: Walden by Thoreau

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To continue my transcendentalist kick (here are my notes on Emerson), I read Henry David Thoreau’s Walden. It was enjoyable.

I recently shed the spiritual but not religious label, but I’m still intrigued by the idea of spirituality, in particular those kinetic experiences in nature for which “spiritual,” despite its ambiguity, seems the most apt description.

Thoreau is all about nature, and would well approve, I think, of the post-college rite of wandering the earth in search of its earthly wisdom. Walden has some eloquent sentences and provocative nuggets. Its themes are nature, simple living, contemplation, and solitude. I skipped many sections, such as his meticulous documenting of cabin life, but I would still recommend it on the whole.

My favorite sentences / nuggets, direct quotes, are below:

  • I, on my side, require of every writer, first or last, a simple and sincere account of his own life, and not merely what he has heard of other men’s lives; some such account as he would send to his kindred from a distant land; for if he has lived sincerely, it must have been in a distant land to me.
  • It is hard to have a Southern overseer; it is worse to have a Northern one; but worst of all when you are the slave-driver of yourself.
  • But it is a characteristic of wisdom not to do desperate things.
  • Confucius said, “To know that we know what we know, and that we do not know what we do not know, that is true knowledge.”
  • In the long run men hit only what they aim at. Therefore, though they should fail immediately, they had better aim at something high.
  • for a man is rich in proportion to the number of things which he can afford to let alone.
  • The Harivansa says, “An abode without birds is like a meat without seasoning.”
  • What should we think of the shepherd’s life if his flocks always wandered to higher pastures than his thoughts?
  • The millions are awake enough for physical labor; but only one in a million is awake enough for effective intellectual exertion, only one in a hundred millions to a poetic or divine life. To be awake is to be alive. I have never yet met a man who was quite awake. How could I have looked him in the face?
  • I wanted to live deep and suck out all the marrow of life, to live so sturdily and Spartan-like as to put to rout all that was not life, to cut a broad swath and shave close, to drive life into a corner, and reduce it to its lowest terms, and, if it proved to be mean, why then to get the whole and genuine meanness of it, and publish its meanness to the world; or if it were sublime, to know it by experience, and be able to give a true account of it in my next excursion.
  • Be it life or death, we crave only reality. If we are really dying, let us hear the rattle in our throats and feel cold in the extremities; if we are alive, let us go about our business.
  • I have always been regretting that I was not as wise as the day I was born. The intellect is a cleaver; it discerns and rifts its way into the secret of things. I do not wish to be any more busy with my hands than is necessary. My head is hands and feet. I feel all my best faculties concentrated in it. My instinct tells me that my head is an organ for burrowing, as some creatures use their snout and fore paws, and with it I would mine and burrow my way through these hills. I think that the richest vein is somewhere hereabouts; so by the divining-rod and thin rising vapors I judge; and here I will begin to mine.
  • I confess I do not make any very broad distinction between the illiterateness of my townsman who cannot read at all and the illiterateness of him who has learned to read only what is for children and feeble intellects.
  • It is as much Asia or Africa as New England. I have, as it were, my own sun and moon and stars, and a little world all to myself.
  • Confucius says truly, “Virtue does not remain as an abandoned orphan; it must of necessity have neighbors.”
  • I find it wholesome to be alone the greater part of the time. To be in company, even with the best, is soon wearisome and dissipating. I love to be alone. I never found the companion that was so companionable as solitude.
  • We meet at very short intervals, not having had time to acquire any new value for each other. We meet at meals three times a day, and give each other a new taste of that old musty cheese that we are. We have had to agree on a certain set of rules, called etiquette and politeness, to make this frequent meeting tolerable and that we need not come to open war.
  • They had nothing to eat themselves, and they were wiser than to think that apologies could supply the place of food to their guests; so they drew their belts tighter and said nothing about it.
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The Scale of China

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It’s really, really hard to convey the scale of China. My usual strategy is to talk about the number of cities that have, say, over 10 million people in them, or whatever.

Here’s one fun fact we learned the other day: the best hospitals in China have on average daily outpatient numbers of 10,000 people. 10,000 outpatients every day. The biggest hospital in the world is in China: 5,000 beds.

Also, there are 470 million pigs alive in China right now.

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Sanitation and Health in China

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The country is going bizerke over Swine flu. But there are so many things that could be done to improve sanitation and health in the country….instead they’re installing more temperature-reading devices at the airport.

Hand soap in bathrooms are rare. Paper towels are even rarer — the drying device of choice is the hot air blower. These, of course, almost never get the job done, so people are disinclined to want to wash their hands in the first place.

Then there’s food cleanliness — in particular cleanliness of plates and dishes and tables. This is an area of weakness all over the third world.

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The Secular Church

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After channeling Jonathan Haidt in a post titled "Why Moral People Vote Republican," Chris Yeh re-surfaces our idea of creating a secular church:

…Democrats appeal strictly to adherents of a Millian view, while leaving Durkheimians with the impression that they ignore the majority of what makes a society moral.

This ties in neatly with some of the thoughts Ben Casnocha and I have had about the secular church; specifically, that secular humanism needs a stronger foundation for expressions of self-control, duty, and loyalty than the small beer of lengthy philosophical discussion. Indeed, were the Democrats wise, they would try to create the equivalent of a secular church based on American patriotism, this providing themselves with both a moral foundation and the means to dispute the Republican monopoly on flag-waving.

Of course, the most important feature of our secular church will be adequate leg room in the pews.

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