APPLE v/s MICROSOFT - The case of Network Effects

Last week during the Information Systems class, the Professor introduced us to the concept of Network Effects and its relevance in business and economics.

Network Effect, or Network Externality, is the effect that one user of a good or service has on the value of that product to other people.

In the presence of network effect, the value of a product or service is dependent on the number of others using it. So, how do companies utilize Network Effect? Are there only positive network effects, or do negative network effects exist too? Let's look at the case of Apple and Microsoft.

When Apple launched its Macbook in 2006, the company claimed that it was better than PCs. Based on 2015 statistics, Macbook's share in the computer market is only 7%, which is almost a third of market share of industry leaders Lenovo and HP (running on Microsoft operating systems) at about 20% each. PCs have become omni-present, because their applications are everywhere. So why did this assumed inferior product win?

The answer lies in network effects. Apple, over the last decade, was promoting negative network effects by limiting the Macbook to only a few applications that were at that time only developed by Apple, resulting in Microsoft gaining the competitive advantage of having many applications to offer.

Ironically, the negative network effects that killed the Apple computer enabled it to redeem itself through the iPhone and the Apps store and at the same time beat Microsoft at its own game.