Platform Strategy & Open Business Models - MIT

Platform Strategy & OpenBusiness ModelsGeoffrey ParkerTulane University & MITgparker@tulane.eduMarshall Van AlstyneBoston University & MITmarshall@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• Platforms beat products every time.• Remake the supply chain to “consummate the match.”• Open the top or the bottom of your platform tounexpected innovation, but don’t open both.• Look to your overlapping users to see where toughcompetitors will attack3

To be a platformThe system must provide a usefulfunction or service and should provide3 rd party access + governance.Examples:iTunes: get musing onto iPodSAP: execute ERP systemsFacebook: connect family, friends &acquaintancesSmart Grids: capture AC/DCsources, route powerNike Fuel: motion capture and socialbenchmarkingPearson: match people to content,deliver content, certify learningYour biz: match … ?

How do traditional linear businessmodels transition to platforms givennetwork effects?

Traditional Supply ChainSupplyManufactureAssembleRetail$ $$6(1) Value accumulates from stage to stage(2) Standard linear value chain(3) Logistics optimize stuff (usu. not incentives)(4) No network effects

Traditional Supply ChainBizBizBizCust$ $Potential B2B Platform Potential B2C Platform$7

Potential B2C Platform1. Make your business a platform by facilitating transactions across your systems.BizBizBizCustCustPotential B2C PlatformBiz8

Creating a B2C Platform1. 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.BizBizBizCust Cust CustBiz9

10This is a really, really differentbusiness model due to networkeffects…

How are these related?eBay SellersAirlines/HotelsXbox DevelopersVisa MerchantsDoctorsYouTube VideographersAirBnb RoomsElectric Car Charge StationsMechanical Turk LaborersMonster EmployersAndroid DeveloperseBay BuyersTravelersXbox GamersVisa CardHoldersPatientsYouTube ViewersAirBnb RentersElectric Car DriversMechanical Turk JobsMonster EmployeesAndroid UsersEach Side Attracts More of the Other

Creating a B2C PlatformMarket OneMarket TwoPricePriceBizBiz Biz Cust Cust Custp 1 p 2q 1 q 2QuantityQuantityPlatform12

Creating a B2C PlatformMarket OneMarket TwoPricePricep 2p 1p 2p 1q 1q 2q 1q 2QuantityQuantityPlatform13

If your supply chain has network effects then…BizBizCust$$… 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.14

Why do platforms beat products?

Apple iPod pre-PlatformApple iPodListenerRetailerMusicProducer$ $$16(1) Product First Thinking(2) Standard linear value chain(3) User bought music retail (or P2P)(4) Minimal network effects

Apple iPod combined with iTunesApple iPodListenerRetailerMusicProducer$ $$17

Apple iPod post-PlatformUserContent$ $Apple18(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 platforms2007 TodayUsr$30/shareDvpr$4/share2007 TodayUsr$53/shareGam$23/shareUsrMusLumiaNokiaPSPSonyZuneMicrosoftUserUserMusicTVDvprHTMLPubliCallsMP3VideoGamesWebeBooksApple has vastly stronger network effects.Sony could Google have done is not this making – has this many mistake great with standalone Android products.Message for you: A great standalone product might not be sufficient.

How Apple is killing standalone platformsP1 Usr R1 Upld U1 P1 Usr R1U1UpldP1 UsrR1U1DvprPolycomeRdrSpeakerphoneSonyPhotoCiscoFlip CameraFlickrBlkbry HPCalculatorRIMUserUserMusicTVDvprHTMLPubliCallsMP3VideoGamesWebeBooksMessage for you: A great standalone product might not be sufficient.

Why Apple isn’t killing KindleWe asked ourselves: “Isthere some way we canbring all of these thingstogether [web service,Prime, Kindle, instant videoand the app store] into aremarkable offeringcustomers would love?”Yes, the answer is AmazonKindle Fire.November 14, 2011: Amazon introduces the Kindle Fire

Kindle Fire Offering• 18 million movies, TV shows, songs,magazines• Amazon Appstore - thousands of appsand games• Cloud-accelerated web browsing -Amazon Silk• Free cloud storage for Amazon content• Color touchscreen with extra-wideviewing 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 popularmovies and TV shows

Why Apple isn’t killing KindleUserUserMusicTVDvprHTMLPubliCallsMP3VideoGamesWebeBooksYou 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.”© 2012 Parker & Van Alstyne

Firms generally consider product feature overlap(differentiation?) to find and benchmark competition.ProductFeaturesZune / iPod Zune / Sony PSP Zune / iPhoneEisenmann, Parker, Van Alstyne, “Platform Envelopment.” Strategic Management Journal, 2011.

User overlap between Platforms predicts competitors.Size (usually but not always) predicts victor.NetworkUsersPlatformProvidersT A T AT AHigh Overlap Low Overlap Asymmetric OverlapEisenmann, Parker, Van Alstyne, “Platform Envelopment.” Strategic Management Journal, 2011.

Open (fragmented) versusClosed (integrated)?© 2011 Eisenmann, Parker & Van Alstyne

Openness vs. ControlMaximum protection ≠ Maximum ValueProprietaryYour ShareOpenIndustry Value AddYour reward = (Value added to industry) x (Your share)27Based on: Shapiro & Varian ‘99© 2011 Eisenmann, Parker & Van Alstyne

Does Openness Work?While Facebook focused on creating arobust platform that allowed outsidedevelopers to build new applications,Myspace did everything itself.Open``Weto developers −tried tocreate every feature in the world and said,Open gift store −`O.K., we can do it, why should we let a third− Open to “.com”party do it?' '' says (MySpace cofounder)DeWolfe. ``We should have picked 5 to 10key features that we totally focused on andlet other people innovate on everythingelse.''The Rise & Ignominius Fall of MySpace – Business Week 201128

Historical Open InnovationMobile Ford Model Church TGoat Hay CarrierFlour Sawmill MillRacecarSnowmobile

Platforms get enormous value from3 rd party developersMost firms can onlyconcentrate on mostvaluable appsProfits increase whenothers add to platform’s“Long Tail”You don’t need toown thisConsider an operating system like MS Windows, Apple Mac, or Google Android

What does controlling openness mean?Side 1 Side 2Platform ProviderPlatformPlatform SponsorSplit IP rights from pointof customer contact.1) Open Access2) Extend Platform3) Touch Customers4) Change Platform31

Models for Organizing PlatformsOne ProviderMany ProvidersUsersDvprsUsersDvprsOne SponsorProviderSponsor1) Proprietary: e.g. MacProvidersSponsor2) Licensing: e.g. GoogleAndroidUsersDvprsUsersDvprsMany SponsorsProviderSponsors3) Joint Venture: e.g. OrbitzDell…AcerRedHatDebianHP…Ubuntu4) Shared: e.g. Linux

Apple tried to control too much of theoriginal MacUsersApple MacMac OSClaris• Remember MacWrite,MacPaint?• Charged ~$10,000 forSDKs.• Controlled OS & HWand dominant Apps.• Vertical integrationchoked network effects.33

Microsoft opened much more of itsecosystemUsersDellDvprsIBM … HP• Microsoft had 6-10Xdevelopers• Open APIs / Cheap SDKs• Controlled OS, licensed.• Strong network effects.MS Windows34

For real profits, control full layerUsersDvprsUsersFlightsUsersDvprsDell…AcerRedHatDebianHP…UbuntuProviderSponsorsProvidersSponsorLinux:No one driving the bus.Limited scope ofcontrol.Joint Venture:e.g. Orbitz airlinecollaborationLicensing:e.g. Google Android35

Danger!AT&T fear of AppleMicrosoftfear ofNetscapeSAPfear ofADPUsers DvprsProvidersSponsorFacebookfear ofInstagramApplefear ofGoogle MapsWatch for new controlpoints closer tocustomer.36

Should Apple have openedthe iPod?Most firms can onlyconcentrate on mostvaluable appsProfits increase whenothers add to platform’s“Long Tail”No! It does 1 thing only, so make it “insanely great” and own it.37

Should Apple have openedthe iPhone?Most firms can onlyconcentrate on mostvaluable appsProfits increase whenothers 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 byPlatform SponsorApps offered byDevelopersRule 1: Absorb the highest value applications from the ecosystem. This addsvalue for users and mitigates threat of disintermediation.Example: Apple iPad absorbed e-booksExample: Microsoft Windows absorbed web browsingExample: Google added Gdrive to absorb functions of DropBox

Anything else to absorb?Apps offered byPlatform SponsorApps offered byDevelopers

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

Why Platforms Beat ProductsValue AddedTime• Based on ownedresources, innovationoccurs at a given rate.• Harnessing 3 rd partyresources, innovationcan occur at a highercombined rate.• Even if a platformstarts behind or hashigher variability, itsvalue can overtakethe product leader.

Platform Ecosystem Rules• Platforms beat products every time.• Remake the supply chain to “consummate the match.”• Open the top or the bottom of your platform tounexpected innovation, but don’t open both.• Look to your overlapping users to see where toughcompetitors will attack43

Thank You!Questions & Discussionmarshall@mit.edu,gparkter@tulane.eduTwitter: InfoEcon© 2011 Eisenmann, Parker & Van Alstyne