Valuation of Network Effects in Software Markets

Transcription

1 Andreas Kemper Valuation of Network Effects in Software Markets A Complex Networks Approach Physica-Verlag

2 Contents Part I Introduction ^x 1 Background and Motivation Research Objectives Research Design Scale and Scope of the Research Target Audience Course of Analysis 9 Part II Valuation in Modern Software Markets 2 Investment and Company Valuation Principles of Investment Valuation Traditional Investment Valuation Asset Value Approach Market Value Approach Discounted Cash Flow Models Real Option Valuation Option-Pricing Theory Real Options Analogy Typology of Real Options : 22, Real Options Management Process Real Options in Practice Reconsideration of Real Options 27 3 Modern Software Markets Principles of Software Markets Fundamental Trends in Software Markets Characteristics of Software Markets " 'Short Product Life Cycles Hypercompetition and Disruptive Innovations Intangible Assets Information Goods 37

3 viii» -. Contents Nonrivalry Property Right Protection Peculiar Cost Structure Supply-Side Economies of Scale Information Overload and Trust Startup Companies Network Effects Reconsideration of Characteristics of Software Markets 40 4 Reconsideration of Valuation in Software Markets Reconsideration of Traditional Investment Valuation Reconsideration of the Asset Value Approach Reconsideration of the Market Value Approach Reconsideration of the Discounted Cash Flow Approaches Reconsideration of Real Options Approaches for Valuation in Software Markets Reconsideration of Option Pricing Models for Valuation in Software Markets Analytical Solution Methods Analytical Approximation Methods Lattice Approaches Finite Difference Methods Numerical Integration Simulations Comparison of Option Pricing Models Parametrization of Real Option Models Specification of the Volatility Specification of the Underlying Probability Distributions Stochastic Processes for Valuation in Software Markets ' Challenges of Valuations in Software Markets 62 Part III Modeling Network Effects in Software Markets 5 Network Economics in Software Markets Principles of Network Economics Typologies of Network Effects in Software Markets Direct and Indirect Network Effects Application, User, and System Effects Properties of Network Effects in Software Markets Feedback Loops Hysteresis, Startup Problem and Critical Mass Excess Momentum 74

4 Contents ix Market Instability and Serial Monopolies Compatibility Multiple Market Equilibria Multiple Product Generations Pareto-Inferior Market Results Competition For and In Software Markets Empirical Evidence of Network Effects in Software Markets Network Effects in Selected Software Market Segments Network Effects in Enterprise Resource Planning Network Effects in Electronic Data Interchange Network Effects in Office Suites Network Effects in Social Network Services Comparison of Software Market Segments Reconsideration of Valuation in Modern Software Markets 83 6 Customer-Equity Valuation in Software Markets Principles of Customer Equity Valuation Revenue Parameter in CLV Models Cost Parameter in CLV Models Retention Rate Parameter in CLV Models DCF Customer Equity Model Generic Customer Lifetime Value Individual Customer Lifetime Value Value of Initial Customer Cohort Total Customer Equity Customer-Based Corporate Value Discussion of the DCFCEV-Model Real Options Customer Equity Model Inverse Mean Reversion Model Customer Equity Model Numerical Example of Customer Value Discussion of the ROV CEV-Model Reconsideration of Customer Equity Valuation 96 7 Adoption and Diffusion Models for Software Markets Software Diffusion Models Fundamental Diffusion Models Markov Matrix Diffusion Model Software Adoption Models Technology Acceptance Model Standardization Models Reconsideration of Software Adoption and Diffusion Models Ill

5 x Contents 8 Network Effects Valuation Framework For Software Markets The Network Effects Valuation Framework Corporate and Software Market Analysis Structure of Software Market Value Driver of Software Companies Cost Structure Analysis Software Market Model Scale and Scope of the Software Market Model Implementation of the Software Market Model Simulation of the Software Market Development Derivation of Data for Valuations in Software Markets Software Company Valuation Model Identification of Main Sources of Uncertainty Selection of Option Pricing Model Determination of Valuation Parameters Calculation of Option Values Sensitivity Analysis Reconsideration of Network Effects in Software Markets 131 Part IV Modeling Customer Networks from a Complex Networks Perspective 10 Complex Networks Theory Principles of Complex Networks Research Relevant Properties of Complex Networks Fundamentals of Complex Networks Theory Degree, Indegree, Outdegree Degree Distribution Network Centrality and Structural Equivalence 140, Network Connectivity Traversity, Clustering and Density Assortative Mixing Patterns Degree Correlations Giant Component Prototypical Network Topologies Random Graph Networks Small-World Networks '» Scale-Free Networks Evolution of Complex Networks Cumulative Advantage Model Preferential Attachment Model 149

6 Contents xi 10.5 Processes on Complex Networks Epidemiology Percolation and Phase Transitions Derivation of Complex Networks Research Hypotheses Complex Networks Adoption and Diffusion Simulator Object-Oriented Software Engineering Object-Oriented Requirements Analysis Network Generation Customer Adoption Rule Network Visualization Data Storage and Exchange Extended Program Features Object-Oriented Design Design Patterns Object-Oriented Implementation Network Topology Adoption Rule Simplifications in the First Step Package Structure of the Implementation Package network.statistics Package technology Package simulator Reconsideration of the Simulator Complex Networks Analysis of Customer Networks Diffusion Dynamics in Varying Network Topologies Hypothesis on Diffusion Dynamics In Varying Network Topologies..' Analysis of Diffusion Dynamics In Varying Network Topologies Reconsideration of Diffusion Dynamics In Varying Network Topologies Scaling Properties of Complex Customer Networks Hypothesis on Scaling Properties of Complex Customer Networks Analysis of Scaling Properties in Software Markets Reconsideration of Scaling Properties of Complex Customer Networks Network Topologies of Complex Customer Networks in Software Markets Hypothesis on the Topology of Customer Networks in Software Markets 206

7 xii Contents Analysis of the Topology of Customer Networks in Software Markets Reconsideration of Topology of Customer Networks in Software Markets Contributions to Customer Network-Centric Valuation Hypothesis on Contributions to Customer Network-Centric Valuation Analysis of Contributions to Customer Network-Centric Valuation Reconsideration of Contributions to Customer Network-Centric Valuation Social vs. Natural Scientific Networks Hypothesis on Social vs. Natural Scientific Networks Analysis of Social vs. Natural Scientific Networks Reconsideration of Social vs. Natural Scientific Networks Reconsideration of the Complex Networks Analysis of Customer Networks Complex Networks Framework for Valuation in Software Markets The Complex Networks Valuation Framework Corporate and Software Market Analysis Structure of Software Markets Value Driver of Software Companies Cost Structure Analysis Complex Networks Software Market Model Scale and Scope of the Complex Networks Software Market Model Topology of the Complex Customer Networks Implementation of the Complex Networks Software Market Model Simulation of the Software Market Development Derivation of Complex Network Data for Valuations in Software Markets Complex Networks Software Company Valuation Model Identification of Main Sources of Uncertainty ' Selection of Option Pricing Model Determination of Valuation Parameters Calculation of Option Values Sensitivity Analysis 240

8 Contents xiii 14 Reconsideration of Complex Customer Networks in Software Markets 243 Part V Summary, Implications, Limitations, and Outlook 15 Summary of Findings Main Findings Insights on Valuation in Modern Software Markets Insights on Modeling Network Effects in Software Markets Insights on Modeling Customer Networks from a Complex Networks Perspective Reconsideration of Findings Implications of Results Implications for Management Implications for Strategic Management Implications For Marketing Strategies Implications For Turnaround Strategies Implications for Financial Sponsors Business Plan Analysis Critical Mass Turnaround Financing Opportunities Business Identification Tools Implications for Research Interdisciplinary Implications for Research Implications for Financial Research Implications for Network Economic Research Implications for Complex Networks Research Research Limitations : General Limitations Limitations of Financial Research Limitations of Complex Networks Research Research Outlook Financial Research Opportunities Opportunities in Investment Valuation Opportunities in Behavioral Finance Opportunities for Empirical Financial Research Complex Networks Research Opportunities ' Heterogeneous Economic Agents 283 ' Network Generation Network Evolution Nature of Social Networks 284

9 xiv Contents Complex Systems Theory Reconsideration of the Research Outlook Executive Summary 287 Bibliography 289 Index of Keywords 307