Recently we’ve been talking about the cascades of information and influence. Communications networks quickly come to mind. We think of mobile phone services and chat clients. Users want to choose the service that allows them to talk to the most people with the least cost. With cell phone service providers create incentives for prospective customers by giving free calls to people in the network. It seems like a great sacrifice on the provider’s part to do this (they’re loosing out on all the money they could charge for those calls) but it really is the market share that matters.

Last year MSN and Yahoo officially connected their chat networks, allowing MSN user to talk to Yahoo users right from their MSN account and vice versa for Yahoo users. Why? Some reasons are obvious. Yahoo and MSN can be considered the underdog when it comes to the chat market. AOL, older, weightier, has a larger user base. AOL dominates ~50 of the market while Yahoo and MSN put together take up the other ~50 percent. Microsoft and Yahoo are by no means small fish in the information industry, but even large corporations such as these need humble themselves when they are playing catch up.

Let look at some of the possible outcomes from a network theory point of view, namely what can Microsoft and Yahoo hope to gain when they considered the new network bridges they’ve formed.

Unlike fax machine or cell phones, chat is an inherently free service (providers make money using advertisements). In class we looked at an economy without networks effects, where cost and demand are the only factors. There we had a price-# users curve that was straight and where users increased with decreasing price. Then we looked at the introduction of network effects where in fact people would be willing to much more than their reservation price in the non-networks-effects price because many other people were also using the same service. With chat we cannot speak of price in that same sense.

From an intuitive point of view it seems that the more people there are using a chat service the more likely someone will switch or adopt that and this would grow without bound: there is no price and payoff increase as more and more people join the same network. This is our simple model. So it makes sense then that Yahoo and MSN are teaming up. They want to beat out AOL. Right? Yes of course. On a macro level, our simple model would say that the eventual equilibrium is that AOL will one day have 100% of the market and everyone else will be drive out. There are a lot of mitigating circumstances that push this the other way, but the larger that gap between AIM’s market share and the nearest competitor the more likely and quickly the market will move in that direction. So by joining their networks, MSN and Yahoo nearly wipe out this macro level effect. Good Move!

But analysts say there is another concern that Yahoo and MSN are trying to address, and that is the emergence of small but quickly growing networks such as Skype G-talk. These smaller, somewhat more intimate, networks are surprisingly robust in the face of the heavy-weight chat clients. Here we consider the micro effect that most people only talk to a small group of people anyway. As long as all of my friends are one the same network, I have no incentive to leave and join the bigger network. G-talk especially takes advantage of the fact that people are already using G-mail to email those who we are likely to talk to in a chat environment. Why do Yahoo and Microsoft want to drive out these smaller networks? I think it’s because these small networks will more likely eat out of Yahoo and Microsoft’s market share than out of AIM’s. Since AIM is old, traditional client, people who try MSN or Yahoo tend to be more willing to try new things, and if they’re going try MSN or Yahoo, they’ll probably give these smaller networks a try too.

So what is the future chat? Google will take over the world…