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Modern Software Markets

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Book cover Valuation of Network Effects in Software Markets

Part of the book series: Contributions to Management Science ((MANAGEMENT SC.))

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Abstract

The focus of the second chapter of the theoretical framework is to profile modern software markets. First, a brief review of the history is presented which illustrates the background of the main research objects, before fundamental trends in software markets are summarized. In the next step, essential characteristics are identified and outlined. As the profile indicates that software markets are governed by network effects, their impact on valuation in software markets will be reconsidered more closely in Chap. 4.

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Notes

  1. 1.

    Software companies operating in software markets are the main research objects of this study. They are defined as hardware independent firms focusing on research, development, distribution and maintenance of software programs (Gerhardt 1992). Software programs, in turn, allow the execution of information processing operations in order to create, transform and analyze data and information. The broader term computer software describes a collection of programs, procedures and documentation that perform operations on a computer system (Baldi 1998).

  2. 2.

    Please confer Sect. 2.2.

  3. 3.

    Please confer (Naisbitt et al. 2001) for additional information on megatrends of software markets.

  4. 4.

    Please confer also Sect. 7.2.1 for the different roles of adopters in customer networks during this product life cycle.

  5. 5.

    A disruptive technology is a technological progress, product, or service that overturns the existing dominant technologies (Bower and Christensen 1995). Please confer the close relationship to the tipping character explained in Sect. 3.3. Similarly, disruptive innovations are defined as new products in new markets (Bower and Christensen 1995).

  6. 6.

    An illustrative example for regeneration is knowledge which increases if it is shared. Likewise, the value of data can increase over time, such as databases which become more valuable if the amount of data increases.

  7. 7.

    It is important to note that the published statistics are subject to discussion as the Business Software Alliance has a biased perspective on software piracy. Founded in 1988, the Business Software Alliance is a group of large software makers that wants to stop copyright infringements.

  8. 8.

    Please confer Sect. 3.3.1.

  9. 9.

    The initial costs are also known as setup or sunk costs. Both terms describe costs which are not be recovered.

  10. 10.

    Please confer Sect. 3.3.6.

  11. 11.

    Please note the difference between network effects and network externalities, which are present if the market participants fail to internalize these effects. Even if individual users are not likely to directly internalize the effect of their membership, other agents such as the owner of a network may very well internalize them. In such a case, the respective network effects are no longer externalities. Unfortunately, the terminology has been some what mixed in literature (Liebowitz and Margolis 1994). Similarly, network effects are frequently mistaken for economies of scale, which result from business volume rather than interoperability. Therefore, demand-side and supply-side economies of scale are explicitly labeled if a distinction is required.

  12. 12.

    Please note that this specific percentage is frequently termed the critical mass of a network (Economides and Himmelberg 1995). It is defined as the minimal non-zero equilibrium market coverage of a network good or service.

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  1. Azaleenweg 114, 60433, Frankfurt, Germany

    Dr. Andreas Kemper

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  1. Dr. Andreas Kemper
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Kemper, A. (2010). Modern Software Markets. In: Valuation of Network Effects in Software Markets. Contributions to Management Science. Physica-Verlag HD. https://doi.org/10.1007/978-3-7908-2367-7_3

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