Instant Messaging and Social Network
Sites: Combining Coopetition Strategies
and Network Externalities
Di Guardo M.C.a , Ennas G.a
a
University of Cagliari
Abstract. In recent years, Instant Messaging (IM) and Social Network Sites
(SNS) have became the most important social platform for computermediated communication. This study proposes an integrated theoretical
framework by combining network externalities and coopetition theory to
investigate the strategic behavior of IM and SNS service providers. We
show how firms generally coopete instead of competing in order to overcome local network externalities and avoid market segmentation, rival
firms divide or partition the overall market into separate segments, with
each firm selling to different segments. This indirectly produces network
effects between competing products.
Keywords. Local Network Externalities, Coopetition, Social Networks, Instant Messaging.
1.
Introduction
Since their introduction, Instant Messaging (IM) and Social Network Sites (SNS) –i.e.
online settings that allow users to register and connect to each other in order to communicate or share resources with primary focus on social interpersonal communication– have attracted millions of users, currently representing the world’s fastest developing personal networking tool. Not surprisingly, this phenomenon has been receiving growing attention from industry and academia for the innovative mode in
which IM and SNS operate [1].
Researchers have highlighted how network externalities have significant effect on
expanding social network potential [2, 3]. Conventional wisdom, in fact, suggests that
network effects should drive faster market growth due to the bandwagon effect. Recently, economic literature has explained that, in particular markets, such mobile,
software or financial products as credit cards, consumers have a preference for staying
in the same network as people they are communicating with [4, 5]. However, in the
IM and SNS markets, network externalities may also create an initial slow-down effect on growth because, generally, potential users wait for early adopters to provide
them with more utilities, before joining in [1, 5].
In this line, previous research has seldom studied how IM and SNS service providers
rely on increasing network externalities to propagate their business model. This ques-
tion is critical, however, because the strategic behavior of IM and SNS providers affects the competitive landscape and the network externalities effects.
Our aim is to explore the behavior of the IM and SNS providers and in doing so we
combine network externalities and coopetition theory [6]. We show how firms generally coopete instead of competing in order to overcome local network externalities
and avoid market segmentations negative effects, otherwise rival firms divide or partition the overall market into separate segments, with each firm selling to different
segments [4]. This indirectly, as we will see later, produces network effects between
competing products.
This paper is structured in three parts, in the first part we define IM and SNS and
recall the basic aspects related to network externalities and coopetition, in the second
part we present some data supporting our hypothesis and discuss related economics
implications. In the third part we give our concluding remarks.
2.
IM and SNS: definitions and properties
Social network sites (SNS) can be defined as web-based services that allow individuals to construct a public or semi-public profile within a bounded system, articulate a
list of other users with whom they share a connection, and view and traverse their list
of connections and those made by others within the system. The nature and nomenclature of these connections may vary from site to site [7]. There are many different
categories of social network: generalist as Facebook or Google Plus, for professional
use as LinkedIn, for dating and so on. Sociologists have studied many properties of
social networks, such as the shortest path, the small-world effect, transitivity or clustering, degree distribution, assortative mixing, and community structure. Recently it
was observed that characteristics of a physical social network also appear in online
social networks [8].
Instant messaging (IM) is near-synchronous computer-based one-on-one communication. With a fast network, transmission times are fractions of a second and the experience is of near-synchronous interaction. Like chat, IM allows users to type messages
into a window, but like the phone, it is based on a dyadic “call” model. Users do not
go into “rooms” to converse with whoever is there; instead there is a single individual
with whom they communicate (although they may have several concurrent dyadic
conversations with different individuals in progress at a given time). Some IM systems support multiparty chat but our data concern the more typical dyadic communications. As with the phone, the intended recipient of an instant message may or may
not “answer” [9]. For instant messaging programs (IM), segmentation is the same
there are generalist such Windows Live Messenger, or Yahoo Messenger, for professional use such Skype but, in comparison with SNS, boundaries in this market are less
defined.
2
2.1 Theoretical background
In this paper to explore the behavior of the IM and SNS providers, we combine network externalities and coopetition theory. A recent web research shows there are over
350 SNS and IM1, showing an highly fragmented market. People choose a SNS or IM
service based on how many other friends (or new friends) can meet. By definition a
network externalities is the value or effect that users obtain from a product or service
will bring about more values to consumers with the increase of users, complementary
product, or service [1]. IM and SNS markets are characterized by strong positive
network externalities, they arise from the specific patterns of interaction between
groups of users, because advantage grow with increasing of other users. The value of
the good or service to the purchaser also depends on the purchaser’s expectations
about the future size of the network [10]. We argue they are subjected to local effects,
in this way as mentioned in introduction, literature is not well structured and there are
no contributions in business study. Banerji and Dutta [4] show that in the presence of
local network externalities, the market can end up being segmented between competing firms. In literature, market segmentation, is intended as the partition of the market
with the purpose of selecting one or more market segments which the organization
can target through the development of specific marketing mixes that adapt to particular market needs [11] When goods or services are subjected to local network externalities segmentation can limit or completely deny the possibility of interoperate, so
consumers are affected by the consumption choices of their neighbors. Use of such
packages e.g. words processor or data analysis package depends at least partly on the
number of her research collaborators who use the same package, rather than on the
total number of users of the package, the same is true for SNS or IM, hence we can
say they are local by nature. We argue, in this market, network externalities effects
are simultaneously direct and indirect, explain the first assumption it is relatively easy
because direct network externalities exists when an increase in the size of a network
increases the number of others with whom one can interact directly. The subscriber
effect occurs when the benefits to society from the addition of an individual subscriber are larger than those recognized by the subscriber in her decision to join a network
[12].
In literature indirect network are only considered as the utility of consumers in the
variety of complementary products available for it [2], classic examples are between
hardware/software, adoption of the hardware by one purchaser confers external benefits on other users of the same hardware, because it expands the installed base of the
hardware, stimulating demand for compatible software [1]. A possible increase in
utility may occur through market mediation (e.g., the number of DVD rental outlets),
1
http://wiki.answers.com/Q/How_many_social_networks_are_there
which in turn is a function of the number of adopters, consumers will wait for a hardware adoption until there is enough software [13].
Coopetition describes the nature of the inter-firm interdependences where both competitive and collaborative issues co-exist. It is a synthesis between two opposite paradigms: the competitive paradigm, postulating that firms interact on the basis of a fully
divergent interest structure, and the cooperative paradigm, assuming that firms interact on the basis of a completely convergent interest structure [14]. The competitive
perspective is represented by Porter and particularly his seminal book “Competitive
Strategy” (1980) and by Williamson and his major contributions on the field of
“transaction cost economics” (1975, 1985). On the other side, the cooperative perspective is shown by Contractor and Lorange (1988), who strongly emphasize on the
benefits of cooperation and regard them as sufficient incentive to be not seduced by
possible benefits of opportunism [15]. Coopetition is a matter of incomplete congruence of interests and goals concerning firms interdependence; in other words, defines
the modern corporate strategy that combines competition and cooperation [16]. Competing firms can then work together, not only to make their products mutually compatible, but to overcome lock-in problems as they arise [17]. The distinction between
the concepts of strategic alliance and coopetition is also interesting. Bengtsson and
Kock (2003) associate strategic alliances with cooperation. Furthermore, Jorde and
Teece (1990) have defined such alliances as bilateral or multilateral relationships
characterized by the commitment of two or more partner firms to a common goal. It is
evident that in their thinking the strategic alliance is nearer to cooperation than competition. A strategic alliance is coopetitive if it includes competitive moves, with regard to at least one strategic variable and collusion or a cartel is coopetitive if the
firms involved compete [18]. Coopetitive relationships are complex as they consist of
two diametrically different logics of interactions. These two logics of interactions are
in conflict with each other and must be separated in a proper way to make a coopetitive relationship possible. Coopetitive relationships are enacted by two types of interactions. On one hand, hostility characterizes actors relationships due to conflicting
interests, on the other hand “friendship” is part of their relationships since they have
to pursue common interests and, accordingly, a collective action [19].
We claim that understanding interfirm interdependences for the IM and SMS providers as a coopetitive game provides new challenges in the strategic behavior of the
firms because reduce market segmentation [18]. In this turbulent markets strongly
innovative and subjected to rapid changes the only way to survive is to gain and keep
a critical mass of users, market fragmentation may lead the effects that only few competitors survive. The cooperative aspect of such knowledge sharing refers to the collective use of shared knowledge to pursue common interests. The competitive aspect
refers to the use of shared knowledge to make private gains in an attempt to outperform the partners [20]. In this way coopetition arise from the need to keep and share
users, friendship is the capacity to attract the largest number of users as possible, with
4
the function “import friend lists and in second by possibilities to log in with a common account, in order to easily permit to known their services with a short registration
and then keep user by hostility that is characterized by maintain they own identities
limiting “connect account feature”. After coopetition between global players is established, the cooperative and competitive element mix does not necessarily remain constant over time.
3.
Data analysis
To support our assumptions, we decided to analyze 10 majors SNS and 4 majors IM,
3 of which are also email providers. For SNS, as expected, get data about ranking was
not easy, there are no specific survey about that, just online research and in most cases
only regional data, so we decided to intersect the numbers of members and the Alexa 2
global sites ranking (Tab. 1). An important exclusion refers to Chinese SNS (Qzone
has over 480,000,000 subscriber); this choice was made because censorship in that
country does not allow the use of many global platforms, so this is not a limitation but
a need in order to have a vision as little as possible distorted by exogenous factors as
such political choices.
Tab. 1 List of SN sites
Name
Approximated
registered
Users
Global Alexa
page ranking
Import
friends
list
Log in with
or short
registration
Connect
account
1
Facebook (G)
901.000.000
2
A,B,C,D
/
all by apps
2
Twitter (G)
480.000.000
9
B,C,D
/
3
Google + (G)
170.000.000
N/A
B,C,D
C*
/
1,2 (3rd
party apps)
4
LinkedIn (P)
160.000.000
13
/
/
/
5
Habbo (D)
200.000.000
6545
/
1,2,3,8,B,C
/
6
Badoo (D)
150.000.000
117
B,C,D
1,7,B,C,D
/
7
Vkontakte (G)
112.000.000
44
/
/
/
8
Myspace (G)
100.000.000
131
C,D
1
/
9
Tagged (D)
100.000.000
281
B,C,D
1
/
10 Netlog (D)
94.000.000
296
B,D
/
/
Data at April 2012 *Not relevant because Gmail account is required to join in Google +
(G) General; (P) Professional; (D) Dating/Discovery (Social discovery is the process by which a user
finds and connects with another)
2
Alexa provides traffic data, global rankings and other information on thousands of websites, and
claims that 6 million people visit its website monthly
Tab. 2 List of IM Programs
Name
A Skype
B
Windows Live*
C
Gmail/gtalk*
D Yahoo*
Data at April 2012
Approximated
registered Users
665.000.000
369.000.000
350.000.000
310.000.000
Import
Log in with or
Connect acfriends
short regiscount
list
tration
1
1
1
1, 4, 9
All emails
1,2,4
/
/
/
/
1,C
/
*Global users, not just instant messaging users
We have focused on three characteristics: the first is the possibility to import friend
lists, the second is the possibility to log-in with other accounts provided by a competitor or to do a short registration using other accounts, and the third is the possibility to
connect the accounts, this feature allows to see friends’ activities from a SNS into
another. As we can see, looking at the above tables, the first characteristics is allowed
and encouraged during registration process by 7 out of 10 SNS analyzed and by the
two bigger IM. On the second feature there are 4 SNS out of 10 permitting log-in with
competitor accounts and all of these 4 admits Facebook, for the second group there
are 3 out of 4. For the third characteristic, the situation is reversed since Facebook
allows all SNS by third party applications and Google+ allows Facebook by third
party applications, for the second group 2 out of 4 permit this feature.
It is important to notice that Twitter and Google + do not allow the possibilities to
connect with all others accounts. This feature give the possibility to the users to see
all activities on their account, hence it is a strategy to keep users as long as possible in
their sites. Probably, causes are that Twitter offers a particular service “share short
messages”, so connect with other accounts may go out of the services aim, therefore it
is not a weaknesses. For Google + reason could be that it is relatively recent and there
are not yet much apps developed. It is clear that this situation increases Facebook
leadership because, offering this feature, it continue to keep its competitive advantage.
As we can see in the above tables, firms coopete at different intensity; according to
Luo [21], intensity of coopetition is a measure of the vigor of a specific coopetitive
relationship with a leading competitor. He proposes four basic types of coopetition’s
intensity, giving heterogeneity to SNS and IM that we think they are applicable. Coopetition intensity’s degree can be a choice or a need, but this element is not static,
rather dynamic in response to changing parameters in both their external and internal
environments [21].
A contending situation exists when the firm races with another major global player for
market power, competitive position, and market share in critical international markets,
maintaining high competition and low cooperation with its counterpart. This case
arises between direct competing firms e.g. general-general SNS or IM-IM, reason is
why they are competing in the same market segment.
6
A partnering situation exists where a global player voluntarily maintains high cooperation and low competition with another major global player. Both are searching joint
synergies created by each one, complementary resources and capabilities. This seems
to be the case between SNS and IM e.g. Skype’s members can make video and voice
calls, as well as send instant messages, to all Facebook friends direct from Skype.
An isolating situation arises when the firm does not interact significantly with other
global rivals, maintaining low competition and low cooperation with another leading
global player. As we can see in the above tables, this strategy is adopted only by few
firms; reasons could be a previous competitive advantage in their segment or the firm
is in a specific market niche without competitors.
An adapting situation refers to the case in which two global players mutually depend
on each other to achieve their respective goals, maintaining high cooperation as well
as high competition with each other. This case is typical between firms that coopete in
different market segments e.g. SNS-IM or general-dating SNS
Given the results of analyzed characteristics, we can see that benefits to join in a SN
or IM x turn also in a potential benefits for SN or IM y because members could extend
their network or join directly or indirectly into another local network. This seems to
be an important and singular way to look at indirect network externalities, because in
this case, we can observe indirect network effects between competing products.
The economic logic behind sharing applications and friend lists is given by Metcalfe's
law, which states that the value of a network is the square of the number of nodes in
the network [22]. In the same way, it states that when a network loses users the value
decrease exponentially. A corollary to Metcalfe’s law is that when two networks connect or interoperate the smaller network benefits more than the larger network does. If
network A has 50 members according to Metcalfe’s law its value is 2,500 (50²). If
network B has 100 members its value is 10,000 (100²). If they interoperate, theoretically, network A could gains 10,000 in value, but network B only gains 2,500 in
value. This is the reason why 4 out of the 10 SNS analyzed permit log-in with Facebook that is the SN with the major number of members. However, it's demonstrated
that Metcalfe's law is too optimistic: some scholars [23] show that the incentives to
interconnect cannot be too strong, and so Metcalfe’s Law cannot be valid. But, as they
argue, it is still true that interconnection between two or more networks generate benefits for all networks, but in a less way than t previously thought (incentives are in
logarithmic scale instead of square scale). This deserves a separate and much depth
analysis that is beyond this paper’s purposes.
4.
Conclusions
This study proposes an integrated theoretical framework by combining network externalities and coopetition theory to investigate the strategic behavior of IM and SNS
service providers, and proposes possible factors to better understand the firms com-
petitive behaviors. We claim that understanding interfirm interdependences in the IM
and SMS markets as a coopetitive game provides new challenges in the strategic landscape. This behavior in fact indirectly produces network effects between competing
products and reduces the market segmentation. Profitable online service performance
depends on understanding factors influencing strategy behaviors. So far, few studies
have investigated these factors.
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