Many technology markets include both a platform device (mobile phone, computer, video game console) and corresponding software (apps, computer software, video games). When a new software entrant launches into such a platform market, its ultimate success might be measured in a variety of ways—sales of the entrant, impacts on sales of incumbent software already on the market, or platform sales. How much of the software entrant’s impact on incumbent software sales is through a direct cannibalization path versus an indirect halo path? A new Journal of Marketing study addresses this important research question to provide a more holistic view of new product introductions and their sales implications.
On one hand, new software might cannibalize incumbents as consumers choose to purchase the new entrants instead of incumbents. On the other hand, the entrants might exert an indirect, positive impact on incumbents by stimulating sales of the platform (i.e., new platform adoptions through the halo effect). Consumers who newly adopt the platform likely backfill their collection of platform-compatible software by purchasing incumbent software. For example, the gamer who wanted access to Super Smash Bros. Ultimate may have needed to buy a Nintendo Switch device and then likely went on to buy other games for the Switch.
Our research team examines platform-based technology markets by studying the relative impact of new software products on incumbent software sales. Using empirical generalizations from video game industry data, we distinguish between the direct and indirect impact. We then quantify the total (net) impact of an entrant by aggregating the effects of each path. In determining effects, we add context by identifying characteristics of entrants and incumbents that moderate each path.
We find that the direct impact of a new entrant usually results in cannibalization, but not always, depending on its characteristics. When entrants are superstars (i.e., extremely high-quality software) and/or members of a franchise (i.e., sequels, prequels, such as the Mario Kart franchise) they directly cannibalize incumbents the most. The incumbents’ characteristics offer little protection against such cannibalization. However, we find that new superstars significantly increase new platform adoption, opening the door for an indirect halo impact that increases sales of the incumbents. By combining both the indirect and direct impacts, we determine the net overall impact: Standard entrants (i.e., software that is not a superstar or part of a franchise) hurt all incumbents, but a new superstar can produce a net positive halo, depending on the context. For example, a 1% increase in entrants with both superstar and franchise status drives a .0207% net increase (direct + indirect) in the sales of incumbent franchise software. The net positive effect occurs because the direct cannibalization of incumbent sales of −.0130% is overcome by an indirect halo effect from new platform adopters that indirectly increases incumbent sales by .0337% (.0207 = −.0130 + .0337).
Our study shows managers how to measure new product performance holistically. In the past, many practitioners have adopted ad hoc estimates of cannibalization. Without historical data, managers might turn to A/B testing, but that approach is expensive and requires clean test manipulation. With our method, leveraging the elasticities from our results, managers can estimate the net revenue of a new entrant by including both halo and cannibalization effects, along with the new entrant’s own revenue.
For example, a new software introduction that is both a superstar and part of a franchise increased the sales of all incumbents by an average of $1.3M additional revenue in the month of introduction. Compared to the average of $5.9M that new superstar-franchise software earns in its first month from its own sales, the halo effect of a superstar-franchise entrant is 22% (≈ 1.3/5.9) of its own revenue. Thus, measuring only the superstar-franchise entrant’s earnings underestimates the total impact. However, we also find that a standard new entrant cannibalizes roughly $224K worth of sales from all incumbents. The average revenue earned by a standard entrant in its first month is roughly $525K, suggesting that 43% (≈ 224/525) of the revenue earned is simply from cannibalizing incumbents. A manager of a standard entrant might overestimate profitability if considering only revenue from the entrant’s own sales. Using the findings from our study, managers can estimate both the direct and indirect impacts of different types of new software based on the specific makeup of the manager’s software portfolio.
Read the authors’ slides for sharing this material in your classroom.
From: BJ Allen, Richard Gretz, Mark Houston, and Suman Basuroy, “Halo or Cannibalization? How New Software Entrants Impact Sales of Incumbent Software in Platform Markets,” Journal of Marketing
Go to the Journal of Marketing