Saturday, October 15, 2005
Microsoft and Yahoo make their Instant Messengers compatible
Why have Microsoft and Yahoo made their instant messenger applications compatible, and what is the likely effect?
Yahoo and Microsoft have competed in the IM space with AIM and with third party integrators such as Trillian and Fire for many years. MSN has the largest global IM population, followed by Yahoo, with AIM a distant third, although it leads in its home market.
This is entirely down to an economic effect of networks known as Metcalfe's law, and a new entrant threat. Metcalfe's law states that the value of a network equals approximately the square of the number of users of the system. To see this, imagine two networks, one with millions of users and another with thousands of users. Firstly, users of both networks will want to get their friends to join them, so they will send out invitations - the larger network sending a disproportionately larger number because it has more users. Secondly, potential users will look at the size of the two networks and correctly reason that they are more likely to find users they know on that one - reducing their 'cost' of co-opting their own network. So, although both networks will initially grow, the larger network will grow considerably faster. As the networks mature, in the end all except a few die-hards will have migrated to the larger network, as more of a user's community of friends and contacts can be found there. Strictly speaking this is for a user-to-user network in which each network and network user is equivalent, and there is no downside to scale like there may be with community networks such as Ryze. It doesn't in the end matter which network is better or has more features, except in the beginning - once the network user numbers diverge significantly, the bigger network will win in the end.
The other side to Metcalfe's law is that if two networks interconnect the larger network will lose any competitive advantage it had over the smaller one in acquiring the next available customer. This is because whichever network the new customer uses, the same network of contacts is available. Therefore, it is not in the interest of a market leader to interconnect to a second or third-placed player, although buying them may be an option. It is also not in their interests to allow a systems integrator to aggregate the networks either, which is why MSN and Yahoo have attempted to block Trillian.
On the face of it, MSN and Yahoo are themselves market leaders - why would they wish to interconnect? However, there is a new player in the market, Skype. Skype's focus is free voice calls, but it also has IM capabilities. By moving the goalposts, Skype has acquired a larger community of users than MSN and Yahoo combined, at 54M, and is growing at a much faster rate than either MSN or Yahoo.
So MSN and Yahoo are getting together because they know they are losing the battle for IM users to Skype. They initially concentrated on IM, a new type of application, ignoring voice, whereas Skype went straight for voice, a service that saves people money, and that seems to be a big mistake. They wouldn't mind if AOL and anyone else joined in, but they won't make much of a difference to the equation.
In the longer term the merged networks might slow the rot, but it probably can't stop it completely. They are already behind, and losing ground fast. Adding or emphasising voice services now that they are already behind and growth has stagnated will not make a huge difference either.
Yahoo and Microsoft have competed in the IM space with AIM and with third party integrators such as Trillian and Fire for many years. MSN has the largest global IM population, followed by Yahoo, with AIM a distant third, although it leads in its home market.
This is entirely down to an economic effect of networks known as Metcalfe's law, and a new entrant threat. Metcalfe's law states that the value of a network equals approximately the square of the number of users of the system. To see this, imagine two networks, one with millions of users and another with thousands of users. Firstly, users of both networks will want to get their friends to join them, so they will send out invitations - the larger network sending a disproportionately larger number because it has more users. Secondly, potential users will look at the size of the two networks and correctly reason that they are more likely to find users they know on that one - reducing their 'cost' of co-opting their own network. So, although both networks will initially grow, the larger network will grow considerably faster. As the networks mature, in the end all except a few die-hards will have migrated to the larger network, as more of a user's community of friends and contacts can be found there. Strictly speaking this is for a user-to-user network in which each network and network user is equivalent, and there is no downside to scale like there may be with community networks such as Ryze. It doesn't in the end matter which network is better or has more features, except in the beginning - once the network user numbers diverge significantly, the bigger network will win in the end.
The other side to Metcalfe's law is that if two networks interconnect the larger network will lose any competitive advantage it had over the smaller one in acquiring the next available customer. This is because whichever network the new customer uses, the same network of contacts is available. Therefore, it is not in the interest of a market leader to interconnect to a second or third-placed player, although buying them may be an option. It is also not in their interests to allow a systems integrator to aggregate the networks either, which is why MSN and Yahoo have attempted to block Trillian.
On the face of it, MSN and Yahoo are themselves market leaders - why would they wish to interconnect? However, there is a new player in the market, Skype. Skype's focus is free voice calls, but it also has IM capabilities. By moving the goalposts, Skype has acquired a larger community of users than MSN and Yahoo combined, at 54M, and is growing at a much faster rate than either MSN or Yahoo.
So MSN and Yahoo are getting together because they know they are losing the battle for IM users to Skype. They initially concentrated on IM, a new type of application, ignoring voice, whereas Skype went straight for voice, a service that saves people money, and that seems to be a big mistake. They wouldn't mind if AOL and anyone else joined in, but they won't make much of a difference to the equation.
In the longer term the merged networks might slow the rot, but it probably can't stop it completely. They are already behind, and losing ground fast. Adding or emphasising voice services now that they are already behind and growth has stagnated will not make a huge difference either.
# posted by Tom Foale : 2:50 AM
