The Environment Is Constantly Evolving
The environment is constantly changing and evolving because:
- Exogenous shocks occur that unsettle the system. For example, Mother Nature acts (there are earthquakes, tornados, hurricanes, etc.) and systems and structures fail (stock markets crash, bridges collapse, etc.).
- Players react to exogenous shocks; and
- Players react to actions taken by other players.
As a result of the evolving environment, new players appear, old players disappear, and the natures of players’ relationships with one another change.
More recently, as the world has become increasingly more globalized, and thus more connected, entities are affected by more environmental shocks, players’ actions, and players’ reactions than ever before.
What this means is that the game is constantly changing.
The Environment Is Uncertain
The current and expected future environments are uncertain because:
- The environment is constantly evolving for the reasons set forth above;
- New players appear and old players disappear without notice;
- Players generally don’t know all the options available to other players;
- More generally, players never really know how other players will react as the environment evolves.
What this means is that players cannot predict with certainty how the game will change.
Environments Are Increasingly Characterized by Network Effects
Network effects exist when the value of being a member of a network increases with the size of the network. There are two different types of network effects, direct and indirect.
Direct network effects are a form of network effects in which members of the network gain value from interacting or sharing resources with other members of the network.
Indirect network effects are a form of network effects in which content (accessories, etc.) availability creates value. Since larger networks attract greater supplies of content, they indirectly provide users with more value.
In particular, most platforms, including those associated with information and communications, exhibit network effects. More specifically, in “Business Model Analysis, Part 2: Platforms and Network Effects,” Tom Eisenmann states
Network effects arise in platform-mediated networks (PMNs), which include networks of customers—often called users—who wish to interact with each other, along with one or more intermediaries who provide a platform, encompassing infrastructure and rules to facilitate users’ interactions. PMNs form the heart of the computer, telecommunications, media, and Internet sectors. However, PMNs are not limited to information industries. They can also be found in financial services (e.g., stock exchanges, credit cards, ATMs), health care (e.g., HMOs), energy (e.g., the power grid), transportation (e.g., airlines, container shipping, gasoline stations), and retailing (e.g., shopping malls, barcodes). A diverse array of matchmaking businesses mediate network transactions, including auctioneers, executive recruiters, realtors, and travel agencies. Ranked by market value, sixty of the world’s 100 largest companies earn >50% of their revenue from platform-mediated networks, including American Express, Cisco, Citigroup, Time Warner, UPS, and Vodafone. In short, PMNs are essential features of modern economies.
The ubiquity of network effects in global environments effectively constrains players’ actions. Notably, many games in the tech environment involve one player who is trying to get other players to switch to a new product or technology. To the extent that the technology at issue – both the existing version currently being used in the marketplace, as well as the new technology being introduced by the new player – exhibits network effects, users will be extremely reluctant to switch from the existing to the new versions.