platform strategy & open business models

Platform Strategy & Open Business Models

Geoffrey Parker Marshall Van Alstyne Tulane University & MIT Boston University & MIT gparker@tulane.edu marshall@mit.edu, InfoEcon@twitter.com

In building a business ecosystem, how do you set strategy?

How do old line business models transition to platforms?

What can be a platform (Windows, PayPal, Facebook … Bauxite, Coca Cola)?

What does an open business model look like?

Can you predict unexpected competition?

© 2013 Parker & Van Alstyne

Platform Ecosystem Rules

3

• Platforms beat products every time.

• Remake the supply chain to “consummate the match.” • Open the top or the bottom of your platform to

unexpected innovation, but don’t open both.

• Look to your overlapping users to see where tough competitors will attack

To be a platform

The system must provide a useful function or service and should provide 3rd party access + governance. Examples: iTunes: get musing onto iPod SAP: execute ERP systems Facebook: connect family, friends & acquaintances Smart Grids: capture AC/DC sources, route power Nike Fuel: motion capture and social benchmarking Pearson: match people to content, deliver content, certify learning Your biz: match … ?

How do traditional linear business models transition to platforms given

network effects?

6

Traditional Supply Chain

Supply

$ $

Assemble

$

(1) Value accumulates from stage to stage (2) Standard linear value chain (3) Logistics optimize stuff (usu. not incentives) (4) No network effects

Manufacture Retail

7

Traditional Supply Chain

Biz

$ $

Biz

$

Biz Cust

Potential B2B Platform Potential B2C Platform

8

Potential B2C Platform

Biz Biz Cust

Potential B2C Platform

Biz

Biz Cust

1. Make your business a platform by facilitating transactions across your systems.

9

Creating a B2C Platform

Biz Cust

Biz

Biz

1. Make your business a platform by facilitating transactions across your systems. 2. Expand the biz partners who can reach your customers. 3. Expand the customers who can reach your suppliers.

Biz Cust Cust

10

This is a really, really different business model due to network effects…

How are these related?

eBay Sellers Airlines/Hotels

Xbox Developers Visa Merchants

Doctors YouTube Videographers

AirBnb Rooms Electric Car Charge Stations Mechanical Turk Laborers

Monster Employers Android Developers

eBay Buyers Travelers

Xbox Gamers Visa CardHolders

Patients YouTube Viewers AirBnb Renters

Electric Car Drivers Mechanical Turk Jobs Monster Employees

Android Users

Each Side Attracts More of the Other

12

Creating a B2C Platform

Biz Cust Biz Biz Cust Cust

Platform

Pric

e

Quantity P

rice

Quantity

Market One Market Two

q1 q2

p1 p2

13

Pric

e

Pric

e

Market One Market Two

Quantity Quantity q1 q2

p1

p2

Creating a B2C Platform

Platform

p1

q1

p2

q2

14

If your supply chain has network effects then…

$

Biz

$

Biz Cust

… you can price wrong … manage the supply chain wrong … get internal organization wrong, and … mismeasure LTV of “free customers” whenever you use linear product model practices.

Why do platforms beat products?

16

Apple iPod pre-Platform

Apple iPod

$ $

Retailer Music Producer Listener

$

(1) Product First Thinking (2) Standard linear value chain (3) User bought music retail (or P2P) (4) Minimal network effects

17

Apple iPod combined with iTunes

Apple iPod

$ $

Retailer Music Producer Listener

$

18

Apple iPod post-Platform

Apple

User Content

(1) Remove supply chain inefficiency (2) Triangular platform supply network (3) Apple owns financial chokepoint (4) Apple helps users find content

(5) Stronger network effects

$ $

How Apple is killing standalone platforms

Lumia

Usr Dvpr

PSP

Usr Gam

MP3

User Music

Video

TV

Games

Dvpr

Web

HTML

eBooks

Publi

Calls

User

Zune

Usr Mus

Microsoft Sony Nokia

Apple has vastly stronger network effects. Sony could have done this – has many great standalone products. Google is not making this mistake with Android

Message for you: A great standalone product might not be sufficient.

2007 Today

$30/share $4/share

2007 Today

$53/share $23/share

How Apple is killing standalone platforms

MP3

User Music

Video

TV

Games

Dvpr

Web

HTML

eBooks

Publi

Calls

User

Message for you: A great standalone product might not be sufficient.

Polycom Speakerphone

R1 P1 U1 R1 P1 U1

Cisco Flip Camera

R1 P1 U1

HP Calculator

Photo

Usr Upld

Flickr

Blkbry

Usr Dvpr

RIM

eRdr

Usr Upld

Sony

Why Apple isn’t killing Kindle We asked ourselves: “Is there some way we can bring all of these things together [web service, Prime, Kindle, instant video and the app store] into a remarkable offering customers would love?” Yes, the answer is Amazon Kindle Fire.

November 14, 2011: Amazon introduces the Kindle Fire

Kindle Fire Offering • 18 million movies, TV shows, songs,

magazines • Amazon Appstore - thousands of apps

and games • Cloud-accelerated web browsing -

Amazon Silk • Free cloud storage for Amazon content • Color touchscreen with extra-wide

viewing angle • Priced at $199 for 7-inch Wi-Fi Version • Fast, powerful dual-core processor • Amazon Prime members get unlimited,

instant streaming of 10,000 popular movies and TV shows

Why Apple isn’t killing Kindle

MP3

User Music

Video

TV

Games

Dvpr

Web

HTML

eBooks

Publi

Calls

User

© 2012 Parker & Van Alstyne

You can’t make calls … unless you load Skype.

Amazon is also being much more sophisticated about giving free data storage service, which allows them to better “consummate the match.”

Product Features

Firms generally consider product feature overlap (differentiation?) to find and benchmark competition.

Eisenmann, Parker, Van Alstyne, “Platform Envelopment.” Strategic Management Journal, 2011.

Zune / iPod Zune / Sony PSP Zune / iPhone

T A T A

Network Users

Platform Providers T A

User overlap between Platforms predicts competitors. Size (usually but not always) predicts victor.

High Overlap

Low Overlap

Asymmetric Overlap

Eisenmann, Parker, Van Alstyne, “Platform Envelopment.” Strategic Management Journal, 2011.

© 2011 Eisenmann, Parker & Van Alstyne

Open (fragmented) versus Closed (integrated)

?

© 2011 Eisenmann, Parker & Van Alstyne

27

Openness vs. Control

Your

Sha

re

Industry Value Add

Open

Proprietary

Your reward = (Value added to industry) x (Your share)

Based on: Shapiro & Varian ‘99

Maximum protection ≠ Maximum Value

28

− Open to “.com”

Open gift store −

Open to developers −

The Rise & Ignominius Fall of MySpace – Business Week 2011

Does Openness Work? While Facebook focused on creating a robust platform that allowed outside developers to build new applications, Myspace did everything itself. ``We tried to create every feature in the world and said, `O.K., we can do it, why should we let a third party do it?' '' says (MySpace cofounder) DeWolfe. ``We should have picked 5 to 10 key features that we totally focused on and let other people innovate on everything else.''

Historical Open Innovation

Hay Carrier

Racecar Flour Mill

Mobile Church Ford Model T

Snowmobile Sawmill

Goat Carrier

Platforms get enormous value from 3rd party developers

Most firms can only concentrate on most

valuable apps

Profits increase when others add to platform’s

“Long Tail”

Consider an operating system like MS Windows, Apple Mac, or Google Android

You don’t need to own this

31

What does controlling openness mean?

Split IP rights from point of customer contact.

1) Open Access 2) Extend Platform 3) Touch Customers 4) Change Platform

Platform Provider

Side 1 Side 2

Platform Sponsor

Side 1 Side 2

Platform Provider

Platform Sponsor Platform

Models for Organizing Platforms

Dell

Users Dvprs

Acer … H

P Red

Hat

Debian

Ubuntu

…

4) Shared: e.g. Linux

Users Dvprs

Sponsor 2) Licensing: e.g. Google

Android

Providers

One Provider Many Providers

3) Joint Venture: e.g. Orbitz

Sponsors

Users

Provider

Dvprs

Users Dvprs

Provider Sponsor

1) Proprietary: e.g. Mac

One Sponsor

Many Sponsors

33

Apple tried to control too much of the original Mac

• Remember MacWrite, MacPaint?

• Charged ~$10,000 for SDKs.

• Controlled OS & HW and dominant Apps.

• Vertical integration choked network effects.

Apple Mac

Users Claris

Mac OS

34

Microsoft opened much more of its ecosystem

• Microsoft had 6-10X developers

• Open APIs / Cheap SDKs • Controlled OS, licensed. • Strong network effects.

Dell

Users Dvprs

MS Windows

IBM … HP

35

For real profits, control full layer

Dell

Users Dvprs

Acer … H

P Red

Hat

Debian

Ubuntu

…

Linux: No one driving the bus.

Limited scope of control.

Users Flights

Provider

Joint Venture: e.g. Orbitz airline

collaboration

Users Dvprs

Sponsor

Licensing: e.g. Google Android

Sponsors

Providers

36

Danger!

Users Dvprs

Sponsor

Watch for new control points closer to

customer.

Providers

Microsoft fear of

Netscape

Facebook fear of

Instagram

AT&T fear of Apple

Apple fear of

Google Maps

SAP fear of

ADP

Should Apple have opened the iPod?

37

No! It does 1 thing only, so make it “insanely great” and own it.

Most firms can only concentrate on most

valuable apps

Profits increase when others add to platform’s

“Long Tail”

Should Apple have opened the iPhone?

Most firms can only concentrate on most

valuable apps

Profits increase when others add to platform’s

“Long Tail”

Of Course! It has video, wifi, camera (scanner), accelerometer, mobile, MP3, web browsing, etc. Platforms benefit from broad contributions.

But control the top several complements.

Which applications to absorb? Apps offered by

Platform Sponsor Apps offered by

Developers

Rule 1: Absorb the highest value applications from the ecosystem. This adds value for users and mitigates threat of disintermediation.

Example: Apple iPad absorbed e-books Example: Microsoft Windows absorbed web browsing

Example: Google added Gdrive to absorb functions of DropBox

Anything else to absorb? Apps offered by

Platform Sponsor Apps offered by

Developers

Anything else to absorb?

Rule 2: Absorb features that emerge in multiple places in the ecosystem. This increases compatibility, ensures efficient implementation, and benefits other apps. Examples: Operating systems support for (i) spell check (ii) cut & paste (iii) PDF.

Why Platforms Beat Products • Based on owned

resources, innovation occurs at a given rate.

• Harnessing 3rd party resources, innovation can occur at a higher combined rate.

• Even if a platform starts behind or has higher variability, its value can overtake the product leader.

Time

Valu

e A

dded

Platform Ecosystem Rules

43

• Platforms beat products every time.

• Remake the supply chain to “consummate the match.” • Open the top or the bottom of your platform to

unexpected innovation, but don’t open both.

• Look to your overlapping users to see where tough competitors will attack

© 2011 Eisenmann, Parker & Van Alstyne

Thank You!

Questions & Discussion marshall@mit.edu,

gparkter@tulane.edu Twitter: InfoEcon