Network effects on the iPhone platform: An empirical examination

• First, we collect and analyze a set of time series that provides a comprehensive overview of the growth of the iPhone as an evolving system.
• Second, in the process of studying the growth dynamics of smartphones, we construct hedonic price indices for Apple (and Android) smartphones through 2011.
• Third, we present what to our knowledge is the first quantitative investigation of indirect network effects on the iPhone platform.
• Fourth, we show that indirect network effects do play an important role in the growth of the system and provide an econometrically-based assessment of that role.

Smartphones are “systems,” that is, collections of (hardware and software) components that work well with one another. They can also be viewed as multi-sided platforms that connect two or more distinct types of customers (users, application developers, handset manufacturers, network operators, and advertisers) and are characterized by the existence of indirect network effects—an extra customer on one side generates benefits for customers on the other side. In this study we focus on one specific aspect of the growth dynamics of Apple׳s iPhone: the feedback effects between users and applications (or application developers). After briefly tracing the history of the iPhone, we construct time series of users and apps. We then carry out cointegration analysis and estimate dynamic OLS (DOLS) and vector error correction models (VECM). We find evidence of indirect network effects of a substantial magnitude.