A few posts ago, I asked you to think about how much you would have been willing to pay for the very first fax machine had you been given the option to buy it. I argued that, absent any foreknowledge about how popular fax machines were going to become, you would have very little interest in acquiring a complicated but useless contraption -useless, because you couldn’t send faxes to anyone and no one could send them to you.
But what if you did have a suspicion that fax machines were going to become hugely popular, and that they would become indispensible tools for doing business through the early 2000s (when they started to be displaced by the wide availability of scanners, printers, and internet access)? Quite naturally, you would then be more interested in owning one.

This introduces an important wrinkle to the definition of network effects that I gave earlier. In networks with positive network effects, potential users’ interest in joining the network increases not with the size of the network, but rather with their perception of the size of the network and their expectations about its size in the future.

How can operators influence the perception of the size of their network?

My last couple of posts might have been a bit discouraging, particularly if you’re a shareholder of a mobile network operator that’s trying to roll out mobile money. The idea of deferring profitability for years, in the hope that you’ll sign up enough users to become a sufficiently valuable network to justify price increases at some undetermined point in the future, will strike many as excessively risky.

The good news is that by carefully crafting a value proposition and a marketing and communications plan, mobile money service providers can dramatically increase the odds that they will build a successful mobile money platform. They can do this with a nuanced understanding of the way that network effects in mobile money work…

In my last post, I said that network effects are apparent when the users of a given network care about how many other users are in the same network. Put more formally, this means that willingness to pay for access to a network is a function of how many other users are on the network. If thirty years ago someone had offered to sell you the very first fax machine in the world, you—absent the ability to foresee the future—would probably have been willing to spend next to nothing for it, because owning the only fax machine in the world would be pointless. Fifteen years ago, however, once fax machines had proliferated widely, you would probably be willing to spend substantially more, since the large number of other machine owners would make it quite a useful piece of technology.

Understanding that network effects, value, and price are closely related suggests an important strategy for avoiding the penguin problem: subsidize early adopters…