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

Historical examples (ISDN, Teletex, telefax, telex) show us that forecasting efforts in thetelecommunication sector can go awry – not only by a few percentage points but by largemagnitudes. We maintain that with strong network effects it is not possible to forecast thesuccess of telecommunication services with a high degree of confidence. This paper reviewsthe role played by network effects for the adoption of telecommunication services, whichlead to diffusion phenomena including critical mass, lock-in, path dependency, andinefficiency. To improve forecasting practices, we propose the master equation approach asan appropriate modelling technique incorporating network effects. A case is made for‘‘thinking in probability distributions’’ rather than deriving misleading linear extrapolationsof trend patterns. At base, the paper argues why these phenomena require a shift, away froma static, to a dynamic analysis; the paper also identifies a formal method suitable for thedynamic analysis.