Competition among virtual communities and user valuation: the case of investing-related communities.

Virtual communities are a significant source of information for consumers and businesses. This research examines how users value virtual communities and how virtual communities differ in their value propositions. In particular, this research examines the nature of trade-offs between information quantity and quality, and explores the sources of positive and negative externalities in virtual communities. The analyses are based on more than 500,000 postings collected from three large virtual investing-related communities (VICs) for 14 different stocks over a period of four years. The findings suggest that the VICs engage in differentiated competition as they face trade-offs between information quantity and quality. This differentiation among VICs, in turn, attracts users with different characteristics. We find both positive and negative externalities at work in virtual communities. We propose and validate that the key factor that determines the direction of network externalities is posting quality. The contributions of the study include the extension of our understanding of the virtual community evaluation by users, the exposition of competition between virtual communities, the role of network externalities in virtual communities, and the development of an algorithmic methodology to evaluate the quality (noise or signal) of textual data. The insights from the study provide useful guidance for design and management of VICs.

Key words: network economics; computer-mediated communication and collaboration; virtual communities; IT diffusion and adoption

1. Introduction

Virtual communities provide unprecedented opportunities for individuals to share information and to interact with others even when no previous social ties exist (Bagozzi and Dholakia 2002, Butler 2001). Business Week's cover story on June 20, 2005, noted that "companies are using Internet-powered services [virtual communities] to tap into the collective intelligence of employees, customers, and outsiders, transforming their internal operations" (Hof 2005). However, Skype CEO Niklas Zennstrom notes that, unlike a typical organization, a virtual community is "almost like an organism" where businesses have little control over their growth and direction (Hof 2005, p. 74). In this paper, we attempt to shed more light on the dynamics of virtual communities. To this end, we address two broad questions for businesses that operate virtual communities: (a) How do users value virtual community networks? (b) How do virtual communities differ in their value propositions, and how do they attract users with different characteristics?

We address the above questions in the context of virtual investing-related communities (henceforth VICs) where users voluntarily participate to obtain or share investing-related information. A number of VICs are hosted by financial portals (e.g., Yahoo!Finance and Raging Bull), while others are pure play message boards (e.g., Silicon Investor). (1) The latest newcomer to the VIC world is Google Finance. (2) VICs host hundreds to thousands of discussion boards on individual stocks and compete to attract individual investors. They allow individual investors to discuss, debate, and evaluate stocks; exchange information; and interact socially (Das and Chen 2001, Antweiler and Frank 2004, Wysocki 1999, Konana and Balasubramanian 2005). Information posted on VICs affect users' attitudes and decisions (Das and Chen 2001). For example, false information posted about NEI Webworld Inc. on Internet chat rooms increased the stock price from 15 cents to more than $15 within a few hours (SEC Litigation 16620, July 6, 2000). In 2000, when an individual "knowingly and willfully" (as stated by the federal grand jury during trial) released a fraudulent negative news item about Emulex Corporation, the stock value plummeted 62% within a few hours. The inherent uncertainty and risks associated with investing activity make the information found on VICs an important resource for users. Furthermore, differing motives and incentives for economic gains (e.g., short-term versus long-term investing) induce varied levels of VIC participation. Thus, VICs offer an ideal context to examine the research questions of interest in this study.

First, we examine how users value VICs. In this context, VICs create value by providing information resources to their community members (Butler 2001). (3) There are two types of such information resources: bundled information from the VIC providers and postings from community members. Examples of bundled information offered by VIC providers include business news, company financials, stock charts, analyst reports, and other stock information. Each VIC provides different levels of bundled information; those levels may change over time. The second information resource is postings, which include messages from community members providing stock analysis, seeking investment advice, or discussing the implications of earnings or news releases.

We argue that postings on VICs exhibit both positive and negative externalities. Positive externalities arise when more postings increase the available information resource for the community. In response to the higher volume of information, the VIC attracts more users who are likely to respond by posting new information, providing analysis or opinions. This, in turn, further increases the extent of the information resource available to community members. The presence of positive externalities can be observed by comparing Yahoo!Finance and newly launched Google Finance. Although Google Finance provides extensive bundled information, its stock discussion boards have been rarely used so far. For the 14 stocks under consideration in this study, the number of total postings on Google between March 2006 and September 2006 is a meager 400. On the contrary, the number of postings on Yahoo!Finance between September 15, 2006, and September 19, 2006, (fewer than five days) for Microsoft stock alone is more than 750. Such a positive externality mechanism has been observed in peer-to-peer (P2P) electronic networks (Asvanund et al. 2004), although the type of resource considered in their study is different.