Two-sided networks

What is a two-sided network?

Wikipedia defines them as:

"economic platforms having two distinct user groups that provide each other with network benefits". 

Two-sided networks can be found in many industries, sharing the space with traditional product and service offerings. They exist in both physical and digital markets. Example from the physical world can include newspapers where subscribers are connected with advertisers. In digital words the obvious example is Google connecting users and advertisers or eBay - connecting buyers and sellers.

Economic platform (as used in the definition above) is a product or service that brings together groups of users in two-sided networks. It provides an infrastructure and rules that facilitate the two groups’ transactions. It also Incur costs in serving both groups and can collect revenue from each.

Two sided network effect

The two groups attract each other and value for a given user depends on the number of users on the other side. Platforms in two-sided networks enjoy increasing returns to scale. Leaders can leverage their higher margins to invest more in R&D or to lower prices to grow further the platform and benefit further from increasing returns to scale. This is driving out weaker rivals and only few biggest players remain in the market.

The platform attract subsidy side users. Once the platform reaches the critical number of users the company starts to monetize the platform - money side users will pay to reach the critical mass of subsidy side users. The bigger the network the more users will pay to access it. Generally, margins improve as the user base grows.

Pricing the platform

One of the biggest challenges in the two-sided networks is how to choose a price for each side of the platform? What will be the impact on the other side’s growth and willingness to pay? In other words,  how much subsidy should one side get – and how much premium should the other side pay?

If the subsidy-side was an independent market it would have to pay more. In this scenario giveaway might be wasted if the network subsidy side can transact with rival platform’s money side.

Pricing is further complicated because of same side network effect. Bigger the network on either side - subsidy or money - attracts more users.

In a nutshell, there are couple factors to be considered:

• ability to capture cross-side network effect,
• user sensitivity to price, e.g. PDF readers are very sensitive about price and publishers will yield more revenue by reaching out to more users than charging less users premium price,
• user sensitivity to quality, e.g. gaming platforms are very sensitive about quality of games delivered by the developers, as one 'low-quality' game may disturb the whole reputation of the platform discouraging other developers and users.

When Apple launched Mac, it charged third party developers $10,000 for the software development kit. In the same time Microsoft gave the Windows kit for free. As a result, Windows had 3 times as many applications.

Winner-takes-all dynamics

A single platform is likely to control the market when:

1. Multi-homing costs are high for at least one user side (the cost of establishing and maintaining platform affiliation)
2. Network effects are positive and strong
3. Neither side’s users have a strong preferences for special features

Sony provides a classic case study example of failure of emerging network with  its Betamax videotape system introduced in 1974. In a nutshell, in mid 70s two platform emerged (1) Betamax, developed by Sony and VHS, developed by Matsushita. Although Sony had better product, in the end VHS was widely adopted mainly because of Matsushita's distribution partnerships that resulted in building the critical mass that enabled cross-side network effect.

Enterprise 2.0: Can firms use crowdsourcing within the organization?

Today, let me present the last post of the Crowdsourcing series. I will try to answer the question: why and how companies can use crowdsourcing?

First, let's try to understand what are the shortcomings of older technologies? In general, we distinguish channels (e.g. email and person to person messenger) and platforms (e.g intranet and corporate site).

Channels present a low degree of community and cannot be accessed by others. Platforms, on the other hand, allow only a small group to generate or approve the content; visit to platforms leave no traces and only a small percentage of people’s output winds up on a common platform.

McAfee (2006) described a case of German investment bank Dresdner Klein- wort Wasserstein (DrKW) using 3 communication tools:

• Blogs
• Wikis
• Messaging software

The investment bank's blogs include interactions, the outputs, and the people involved. Anyone in the company can read them. Any episode of knowledge work is widely and permanently visible to all. McAfee (2006) later suggested that these technologies can facilitate knowledge work in ways that were not possible before by creating a collaborative platform that reflects the way work really gets done.

Before introducing blogs and wikis knowledge workers felt that current technologies are not doing a good job of capturing knowledge. While all knowledge workers surveyed used e-mail, 26% felt it was overused in their organizations, 21% felt overwhelmed by it and 15% felt that it actually diminished their productivity.

Components of Enterprise 2.0 technologies

Search

For any information platform to be valuable, its users must be able to find what they are looking for. However, it is not always the case. In the Forrester survey, less than half of respondents reported that it was easy for them to find what they were looking for on their intranets.

Links: between pages, reflect the opinion of people

Google made a huge leap forward in Internet search quality by taking advantage of the information contained in links between Web pages. Links are an excellent guide to what’s important and provide structure to online content. In this structure, the “best” pages are the ones that are most frequently linked to.

Authoring: creates content

Internet blogs and Wikipedia have shown that many people have a desire to author — to write for a broad audience. Blogs let people author individually, and wikis enable group authorship. When authoring tools are deployed and used within a company, the intranet platform shifts from being the creation of a few to being the constantly updated, interlinked work of many.

Tags: better categorization of content

The Forrester survey revealed that after better searching mechanisms, what experienced users wanted most from their companies’ intranets was better categorization of content. Some sites on the Web aggregate large amounts of content, then outsource the work of categorization to their users by letting them attach tags — simple, one-word descriptions.

Extensions: “if you like this, you will probably like also..”

Moderately “smart” computers take tagging one step further by automating some of the work of categorization and pattern matching. They use algorithms to say to users, “If you liked that, then by extension you’ll like this.” Amazon’s recommendations were an early example of the use of extensions on the Web.

Signals: when new content of interest appears (e.g. RSS).

Even with powerful tools to search and categorize platform content, a user can easily feel overwhelmed. New content is added so often that it can become a full-time job just to check for updates on all sites of interest.

Corporate social networking

…is the use of technology to help employees identify:

• Who knows what
• Who is interested in what
• Who wants to contribute to what...

in the interest of improving the business of the firm.

There are plethora of tools that employees and companies can use for that. E.g.

• Profile based sites (e.g. Google+, Facebook)
• Discussion forums
• Tools that analyze emails, instant messaging and virtual spaces to identify social networks
• Tagging tools
• Mashup tools (combine info from different sources)
• Quick connection tools such as Twitter, instant messaging
• Co-generation tools such as wikis
• Expertise location and sharing tools

Firms may use these tool to achieve different goals, e.g. connecting people, training and new hire orientation. However, there are couple of principles that companies need to be aware of:

• People engage in things they find interesting. Tools help determine what people are interested in and connect people with similar interests.
• Co-generation of ideas is done by people “serving themselves”. This is promoted by making it easy to add and share info.
• Under-explored relationships will surface when people, data and applications are circulated and tagged.

Source: McAfee, Andrew P. "Enterprise 2.0: The dawn of emergent collaboration."Management of Technology and Innovation 47.3 (2006).

The contribution revolution: Why do people contribute?

There are many ways how people can contribute and help companies build their ecosystem.

• Shoppers on Amazon automatically contribute to a recommendation system by making purchases, rating items, sellers and by leaving comments and sharing experiences. Today, information will decide about your competitive advantage, so it is important to design your business to benefit from collecting data of users' actions by product.
• Del.icio.us allows users to organize their bookmarks and create from that a web index that they use for suggestions to other, similar users. In this case, practical solution is driving number of contributions - users get reasonable immediate reward - they getting their bookmarks organized.
• Users of Google+, Facebook and Twitter can benefit from interacting with others, being part of a community. Social reward is the driver behind most of the interactions. It took Facebook and Twitter, 4 and 5 years respectively to reach 100M active users globally, and Google+ crossed this milestone in just a year. This only shows the power behind social interaction. 
• Reputation is another strong contribution driver. Desire for public recognition is widely use by Wikipedia. They proofed that millions people working together can produce high quality articles and entries. 
• YouTube leverages self expression desire and it is on fire at the moment. 800M people are watching 4B hours a month on YouTube. Every minute there is over 72 hrs of video uploaded.
• Last but not least, altruism can also be a driver of contribution. People want the truth to be heard. If they get exceptional service in a good restaurant - they want to reward it by sharing their experience on Yelp! and recommend it to other people.  

Crowdsourcing, attention and productivity

There is a very interesting article by Huberman, Romeo and Wu (2009) exploring possible reasons why do people contribute and upload their videos on YouTube without any payment. It is said that people who behave rational would free ride on the production of others. Huberman et al. suggest that for contributors, videos are private goods – and the payment is attention.

A 2007 survey by McKinsey found that content creators’ desire for fame was their primary motivation for uploading videos. Other motivations cited were the desire to help others and to have fun. In terms of profiting from their videos, some users were open to the idea of compensation sharing, but that was not a primary driver.

Users of YouTube are contributors; they contribute and get attention and public recognition as a reward. As a result the productivity of the contributors depends on the number of views and/or downloads (the attention). The more views contributors received in one period, the more videos they uploaded during the following period. On the other hand lack of attention may lead to decrease in the number of the uploads.

What should YouTube do? Should they pay people for uploading their videos on their platform? In my opinion, the idea of monetary compensation, as suggested by the study of McKinsey, should not be followed by YouTube. According to Vohs, Mead and Goode (2008) the concept of money changes personal and interpersonal behavior (you can read more here: Impact of activating the concept money). People can start behaving like under monetary market rules, i.e. the individuals’ level of effort is influenced by the amount of compensation. Monetary markets are highly sensitive to the magnitude of compensation, whereas social markets are not. Under social market conditions, the effort is shaped by altruism and the amount of compensation is irrelevant.

Source: Cook, Scott. "The contribution revolution: Letting volunteers build your business." Harvard Business Review 86.10 (2008): 60-69.
Huberman, Bernardo A., Daniel M. Romero, and Fang Wu. "Crowdsourcing, attention and productivity." Journal of Information Science 35.6 (2009): 758-765.Vohs, Kathleen D., Nicole L. Mead, and Miranda R. Goode. "Merely activating the concept of money changes personal and interpersonal behavior." Current Directions in Psychological Science 17.3 (2008): 208-212.

Impact of activating the concept money: A fine is a price

Let me start with the summary of the experiment by Vohs, Mead and Goode (2006) to illustrate the impact of activating the concept money.

Day care centers operate between 7:30am and 4:00pm. When a parent doesn't arrive on time to collect a kid, one of the teachers has to wait until the pick up.

Day care center decided to impose a fine on parents that arrived late. As a result, a steady increase in the number of parents coming late was observed - almost double after a month (sic!). When the fine was removed, number of parents coming late remained at the same high level.

Why was there an increase in the behavior being punished?

The introduction of the fine changed the perception of people regarding the environment in which they operate. Before introducing the fine parents may have interpreted the action of the teacher in the first period as a generous, non-market activity. They thought "I should not take advantage of it".

With the fine, a new perception has been introduced: "I can buy this service". There was no guilt or shame for parents to be late.

It needs to be underlined that even after the fine was removed, the mindset, perception didn't change. Social relationships are not easy to reestablish. As Vohs, Mead and Goode (2006) argue "once a commodity, always a commodity". As a result, long term negative effect was observed. 

The psychological consequences of money

Vohs, Mead and Goode (2009) argue that "money makes people feel self-sufficient and behave accordingly" 

In their paper the they describe 9 experiments to showcase the impact of activating the concept money.

For the experiment the used screen savers with sentences including words such as salary (vs. neutral words), or screen savers showing money (vs. fish or no screensaver).

They observed that reminders of money led to reduced requests for help and reduced helpfulness towards others. Participants reminded of money preferred to play alone, work alone, and be more distant. Activating the idea of abundance of money made people work significantly longer before asking for help (relatively to restricted amount of money). 

When the experimenter asked for help, participants reminded of money volunteered to help for 25 minutes on average, vs. 42.5 in the control group. Participants reminded of money spent ½ as much time helping a confused associate. They also donated less money to the student fund.

Activating the concept of money

Merely activating the concept of money changes personal and interpersonal behavior.

"After people are reminded of money, they show improved memory of exchange-related information, prefer exchange-based relationships, and follow equity rules".

Managerial implications

Money has been said to change people’s motivation (mainly for the better) and their behavior toward others (mainly for the worse). The results of experiments suggest that money brings about a self-sufficient orientation in which people prefer to work alone and don't ask for help.

So, dear Managers if you want your teams to work better together, stop bringing up the concept of money every time in your motivational speeches. 

Source: Vohs, Kathleen D., Nicole L. Mead, and Miranda R. Goode. "Merely activating the concept of money changes personal and interpersonal behavior." Current Directions in Psychological Science 17.3 (2008): 208-212.Vohs, Kathleen D., Nicole L. Mead, and Miranda R. Goode. "The psychological consequences of money." science 314.5802 (2006): 1154-1156.

Behavioral economics and crowdsourcing

Behavioral economics uses social, cognitive and emotional factors in understanding the economic decisions of consumers. It integrates insights from psychology with economic theory.

Social vs. market norms

Imagine you are at a dinner at your mother-in-law’s house. Try to answer the following question:

• Would paying be a good idea?

Answer to this questions seems to be pretty straightforward. It is simple, because we assume to apply social norms here. According to social norms, that are defined as derived from our social nature and our need for community, you wouldn't be required to pay for the meal.

However, from the market norms' perspective - based on costs and benefits - you would.

Working for a cause vs. working for money

In many cases people work more for a cause than for cash. Let's analyze the results from the AARP (American Association of Retired Persons) study. When lawyers were asked to offer less expensive services to needy retirees ($30 an hour) – they declined. However, when asked to offer free services – they agreed.

What does it tell us?

People act differently under social and market norms.

Do they also perform differently?

Performance under market vs. social norms

Let's now have a look at how working under social vs. market norms affects performance.

Case 1: Working for money
Students were asked to perform a boring task for 5 minutes

• Group 1 didn’t get paid
• Group 2 got 5$
• Group 3 got 50 cents

Results:

• Group 1: best performance
• Group 2: slightly worse
• Group 3: the worst 

Case 2: Working for a gift
The same experiment with gifts:

• Group 1: no gift
• Group 2: chocolate worth 5$
• Group 3: chocolate worth 50 cents

Results:

• All three groups had the same performance

Even small gifts keep us in the social exchange world – and away from market norms

Case 3: Work for an explicitly priced gift

• What about “50-cent snickers bar” and “five-dollar box of Godiva chocolates”?

Results:

• The same performance as with money: the students reacted to the explicitly priced gifts the same way they reacted to cash

Once market norms enter our considerations, the social norms are pushed out

Summary

Heyman and Ariely (2004) distinguish between monetary markets and social markets:

• Monetary markets are highly sensitive to the magnitude of compensation, whereas social markets are not
• Money market: effort depends on reciprocity, the amount of compensation directly influences individuals’ level of effort
• Social market: effort is shaped by altruism, the amount of compensation is irrelevant
• Explains a well established observation: people sometimes expend more effort for no payment (vs. low payment)
• Mixed markets closely resemble monetary market: signaling that a compensation is equivalent to money invoke market norms

Crowdsourcing and open source projects operate under social norms. As research shows merely activating the concept of money completely change the setting and heavily influence people's performance.

Next post will cover some other aspects of psychological concept of money. Stay tuned!

Source: Heyman, James, and Dan Ariely. "Effort for payment a tale of two markets."Psychological Science 15.11 (2004): 787-793.

Crowdsourcing: social phenomenon in monetary markets

Today, probably everybody has heard about crowdsourcing. However, do you know what is it? More importantly, do you know why do we do it? How do firms exploit it? And what are the implications for competition?

This post starts a short series on crowdsourcing. We will have a closer look both at psychological aspects and market consequences:

• How concept of money changes personal and interpersonal behavior?
• Enterprise 2.0 and social networking within corporation
• What drives people to contribute for free?

Today we start with general information about crowdsourcing, definition and examples.

What is crowdsourcing

—First time this term was coined by Jeff Howe in June 2006 in Wired. Howe presented crowdsourcing as a

"business model that leverages the power of online communities for profit". 

"Wired" cover: June 2006

It combines 

"the best aspects of open source production and outsourcing".

According to Wikipedia —

“crowdsourcing is defined as the act of taking a task traditionally performed by an employee or contractor, and outsourcing it to an undefined, generally large group of people, in the form of an open call.”

There are three main pillars of crowdsourcing:

• —Collective intelligence: a million heads are better than one 
• —Crowd wisdom: aggregating the individual solutions of many is often better than collaboration for problem solving 
• —New media technology (Internet): helps cast a wide net to harness this talent

The power of the crowd

Empire State Building

Facebook 1bn users spend on average 8 hours per month on the site

= 8 billion hours per month

= 266 million hours per day

Empire State Building took 7 million man hours to build. Time spend every day on Facebook is enough to build 38 new Empire State Buildings every day!

Why do users contribute?

They contribute for a sense of collaboration and trust. Below are the main drivers for users' contribution:

• Collect participants’ resources or data 
• To get a reasonably immediate rewards 
• Social rewards, being part of the community 
• Reputation 
• Self expression 
• Altruism 

If you are interested in how concept of money changes social behavior, stay tuned for the next post.

Source: Cook, Scott. "The contribution revolution: Letting volunteers build your business." Harvard Business Review 86.10 (2008): 60-69.

What are the advantages for companies?

1. —Cost advantage. These sites enjoy free “raw materials”, ex: eBay, an online store with no inventory 
2. —Scalability advantage. Contributions of countless people can be aggregated into vast compilations that surpass traditional offerings. Wikipedia has ten times as many articles as Britannica. 
3. —Competitive advantage. The network effect put in motion a spiral in which increasingly more people choose to use and contribute to it.

The Economics of Technology Sharing

In this post I will try to answer the question why programmers invest their own time in OS projects? What motivates them to contribute and what is in it for commercial companies?

Literature provides us with 6 possible reasons:

• Improve performance in paid work (e.g. system administrators looking for solutions for their companies) 
• Intrinsic pleasure (e.g. cool project) 
• Future job offers, shares in commercial open source based companies 
• Ego gratification from peer recognition 
• The promise of higher future earnings 
• Intellectual curiosity 

Signaling 

Other very important reason for investing programmers’ time in open source projects is signaling, i.e. proving high level of competence. Why this is important in OS? Because the ability to signal a high level of competence can be higher in an OS project. 

• Outsiders can see the contribution of each individual 
• The programmer takes full responsibility for a subproject 
• More knowledge can be transferred to new environments, because many elements of the source code shared across OS projects 

Let’s have a look at the Apache Project.

Instead of central leader they have a series of committees to resolve open issues. There are five levels of rank within the Apache Software Foundation (ASF): 

• Developer 
• Committer 
• Project management committee member 
• ASF member 
• ASF board member 

Advancement is made in recognition of an individual’s commitment and contribution to an Apache project. Empirical study (Hann et al 2004) showed that: 

• Sheer volume of contribution have little impact on salary 
• Moving into higher rank resulted in 14-29% increase 

Commercial Firms

Commercial firms may interact with open source projects in a number of ways:

• Benefit from complementary markets 
• Benefit from learning 
• Benefit from good public relations 
• Compete directly with open source providers 

Example: IBM and HP released codes to open source communities

Why?

Bait and hook: if the released code will be used more widely, profits in the complementary segment will grow (e.g. from consulting services)

Other very important reason is that many small developers are uncomfortable doing business with large firms, that may compete in the developers segment and reduce price in order to raise demand for the broad software platform.

By contrast, when a large firm makes its platform available on an open source basis, the small firm need no longer fear being squeezed.

However, we don’t know if the corporation will keep all source code in the public domain? Or if it will highlight important contributions adequately?

In this case important licensing plays important role.

Open source licenses

Permissive license

users retain the ability to use the code as they want. Common in projects with strong appeal to the community of contributors

Restrictive license 

common in projects geared for end users who are unlikely to appreciate the coding (e.g. computer games)

Quality

There is no consensus if open source software is superior to “off-the-shelf” commercial software. Advocates of OS code’s higher quality stress that:

• Users can enhance quality 
• Users can customize it to meet particular needs 
• There is a superior development process: 
• Workers in commercial firms may not report errors of fellow employees – however OS programmers do not have incentive to collude, and their project is more peer reviewed 
• Security flaws are more easily identified because many people are involved 

Counter arguments:

• The openness of the code allows hackers to figure out its weaknesses 
• Poorer documentation (due to the incentives structure) 
• Poorer user interface 

Public policy

Governments around the world encourage the development and use of open source projects. However, the impact on social welfare is not conclusive:

• OS projects have access to a larger talent pool 
• On the other hand: free riding problem 

According to static point of view, any potential user has access therefore OS increase social welfare.

Dynamic view states that developers may lack incentives to introduce new products therefore OS reduce social welfare.

Bibliography: Lerner, Josh, and Jean Tirole. The economics of technology sharing: Open source and beyond. No. w10956. National Bureau of Economic Research, 2004.

Innovation models

In organizational science there are two prevalent models of innovation:

(1) Private investment model
(2) Collective action model

Open source contains elements of both models, and represents private-collective model

The private investment model
In the private investment model an innovator earns from private goods thanks to intellectual property protection. Intellectual property laws are simply the innovators’ rights to their work. They are an incentive to create new knowledge for the innovators. However, intellectual property protection diminishes knowledge dissemination.

The collective action model
The collective action model works under conditions of market failure, where innovators collaborate in order to produce a public good.

Provision of public goods implies that if any user consumes it, it cannot be feasibly withheld from other users. This infers two main problems:

(1) Free riding problem
(2) Incentive problem

General solution to those problems is to provide monetary and reputation-based rewards to innovators.

Private-collective model
Private-collective model comprises of both models where incentives for private investment and collective action coexist.

First of all, software users rather than software manufacturers are the typical innovators; a fundamental incentive is using the software. Secondly, innovators freely reveal the proprietary code they developed. This implies (1) an increase of innovator benefits (e.g. sales of complementary goods) and (2) private losses will typically be quite low, rivalry with potential adopters is low – but the reward may be significant (e.g. reputation, reciprocity, building a community)

In private investment model it is assumed that free revealing of code leads to a loss of private profits. Conversely, in OS projects free revealing can result in net gains for the company. For example, free revealing can increase innovation diffusion and so increase an innovator’s profits through positive network effect.

Collective action model assumes a free rider can obtain equal benefits to those a contributor can obtain. Conversely, in OS projects contributors gain private benefits which are stronger than those available to free riders, e.g. learning and enjoyment, sense of ownership and control over the work, they can choose the project, the task and the technical approach to suit their own interest, and last but not least participating in a community. These rewards reduce the free riding problem.

It is worth noting, that free riders can be good for the company. There are two reasons for that (1) their adoption of the software increase its market share and help to set it as a standard in a marketplace, (2) some users do not write code – but contribute by reporting bugs.

Source: Eric von Hippel and Georg von Krogh (2003) "Open Source Software and the 'Private-Collective' Innovation Model: Issues for Organization Science" Organization Science 14, 209-223.

Open Source

What is open source?

Open source usually refers to software that is released with source code under a license that ensures that derivative works will also be available as source code, protects certain rights of the original authors, and prohibits restrictions on how the software can be used or who can use it.

You can find over 300k open software projects on Sourceforge.net - provider of free services to open source developer.

What is an open source project?

Open source project is a voluntarily collaboration of Internet-based communities of software developers to develop software that they or their organization need. Contributors agree to make all enhancements available to everybody. Many of contributors are not paid; the strucutre is often loosely structured, contributors are free to choose interest area.

Open Source is different from shareware, freeware and crowdsourcing. Shareware is a proprietary software provided for free (binary files), usually on a trial basis (the user pay for continued use/support). Freeware is a software provided for free (can be copyrighted or in the public domain). Crowdsourcing is basically an outsourcing of a task to a group of contributors.

Early history

1960s-1970s: sharing source code was commonplace (part of the research cultures). Software was mainly developed in academic and corporate labs by scientists and engineers

Early 1980’s: AT&T enforced its property rights of Linux, to which many academics and other corporate researchers contributed

1985: The Free Software Foundation was established by Richard Stallman, a programmer at MIT Artificial Intelligence Laboratory

"Software users should freely learn and create; software should be free to use, modify and distribute" The philosophy of The Free Software Foundation

1998: the Open Source Movement was founded by prominent hackers, replacing the term “free software”
and emphasizing the practical benefits of OS (economic and technological)

Watch a video of Richard Stallman talking about the open source:

How OS projects evolve?

A project is typically initiated by an individual or a small group having an idea, for an intellectual, personal or business reason. Anyone with the proper programming skills and motivation can use and modify any OS software written by anyone. The project initiators usually become the project “owners” taking responsibility for project management. Others can download, use and “play” with the code (most of them are free riders). However, some go on and modify the code and then they post it on the project website for others to use it and for feedback. In many projects the privilege of adding to the authorized code is restricted to only a few trusted developers a.k.a. “gate keepers”.

Who is using OS?

• 20% of Internet users use Firefox (source: www.statowl.com, 06-2012)
• Facebook uses PHP and MySQL and is the largest user in the world of memcached, an open-source caching system 
• Google has over one million servers running a customized Linux version as an operating system 
• 50% of web servers employ Apache 
• 60% of web servers use Linux as an operating system 
• PERL and PHP are the dominant scripting languages

How do imitations erode the benefits of first movers?

As we discussed in post Is it always better to be first in Internet space? first movers can benefits from:

• experience/learning curve effects: reduce manufacturing costs 
• secure supply of raw materials if scarce resources 
• establish preferential shelf space, distribution channels and product segment 
• create buyer awareness and high switching costs as entry barrier to imitators 

However, Lee et al (2000) researched that first mover advantages were completely eroded by early and late imitations. Even more interesting is that even late imitation had significant influence on first mover stock market performance.

Early and fast movers achieve greater gains than the late and slow companies. However, they often suffer from new product imitations. Sometimes a fast second move can produce superior results.

Early imitations can be a profitable alternative to moving first, because:

• imitator learns from the first mover’s experience, they can reduce the risk or avoid the mistakes 
• avoid pricing mistakes 
• limit risk exposure and cut developing costs by reverse engineering 

The faster a firm introduces a new product, the higher the abnormal returns; first & second movers will (on the average) report higher abnormal return than late movers.

At a tie of new product imitations, the abnormal returns will be negative for the first movers; the faster a firm imitates, the greater the negative abnormal returns for the first mover (or the less durable the first mover advantages)

Summing up, there are two important implications for the companies:

(1) the faster & earlier a firm introduces a new product, the greater the shareholder wealth effect
(2) imitations impact negatively first movers, even late imitations

Source: Lee, Smith, Grimm & Schomburg (2000): Timing, Order and Durability of New Product Advantages with Imitation, Strategic Management Journal, 21, 1, pp. 23-30.