Forecasting the success of telecommunication services in the presence of network effects

Detlef Schoder, University of Freiburg

1/01/2005
(Original Publish Date: 2000)

Historical examples (ISDN, Teletex, telefax, telex) show us that forecasting efforts in the telecommunication sector can go awry, not only by a few percentage points but by large magnitudes. We maintain that with strong network effects it is not possible to forecast the success of telecommunication services with a high degree of confidence. This paper reviews the role played by network effects for the adoption of telecommunication services, which lead to diffusion phenomena including critical mass, lock-in, path dependency, and inefficiency. To improve forecasting practices, we propose the master equation approach as an appropriate modelling technique incorporating network effects. A case is made for "thinking in probability distributions" rather than deriving misleading linear extrapolations of trend patterns. At base, the paper argues why these phenomena require a shift, away from a static, to a dynamic analysis; the paper also identifies a formal method suitable for the dynamic analysis.