Reconsideration of Network Effects in Software Markets

Abstract

The first important step was to identify the relevance of networks effects for valuations in software markets, as they are frequently ignored in the traditional literature. The failure to consider network effects can incite suboptimal underinvestment strategies, particularly if software companies operate in customer networks close to the critical mass. In order to develop a network effects framework for valuations in software markets, research on network economics, customer-equity valuation as well as on adoption and diffusion research was reviewed. The result is a framework that allows one to quantify network effects with software market models based on underlying adoption and diffusion models. In summary, the developed network effects model for valuation in software markets is the first step to close some of the identified research gaps, but it also reveals a variety of further research opportunities.