Platform Economics and Driving Innovation - MIT...

Platform Economics and Driving Innovation

Geoffrey Parker Marshall Van Alstyne Tulane University & MIT Boston University & MIT

CDB Annual Conference May 23, 2012

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Understanding platforms

Externalities and network effects in ecosystems

Winner-Take-All

Elements of platform strategy

Analytics

Pla

Agenda

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Product platforms

Subsystems and interfaces to form structure from which multiple products can be efficiently developed.

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Industry Platform Battles

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Interview: Platform Definition “A platform is a set of tools provided to other entities who provide services on top of the platform. The platform is not sold but services on top are sold. Customers are not exposed to the tools, but to the service. It’s a public solution model and development environment.”

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Industry Platform Definition A foundation technology or set of components (could also be a service) used beyond a single firm

Allows multiple parties (“market sides”) to transact across the platform

Value of the platform may increase non-linearly with more users – depends on strength of network effects.

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Understanding platforms

Externalities and network effects in ecosystems

Winner-Take-All Effect

Elements of platform strategy

Analytics

Pla

Agenda

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Traditional Linear Value Chain

Stage 1

Stage 2

Stage 3

Value accumulates from stage to stage Minimal Network Effects

$ $ $

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Apple iPod pre-Platform

User Apple Content

$ $

(1) Product First Thinking (2) Standard linear value chain (3) User matches MP3 player to library (4) Minimal network effects

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Apple iPod post-Platform

Apple

$ $ User Content

(1) Triangular platform supply network (2) Apple owns financial chokepoint (3) Apple matches users to content

(4) Stronger network effects

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A two-sided network has four network effects

A same-side effect for each side, i.e., preference regarding number of other users on own side

A cross-side effect in each direction, i.e., preference regarding number of users on other side

$ $ Side 1 Side 2

Platform

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Agenda

Understanding platforms

Externalities and network effects in ecosystems

Winner-Take-All Effect

Elements of platform strategy

Analytics

Pla

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Homing and Switching Costs

2 SETUPS + 2 ONGOING

1 SETUP + 1ONGOING

Mono-homing

Switching

Multi-homing

2 SETUPS + 1 TERMINATION + 1 ONGOING

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“Winner Take All” (or Most) if… Strong network effects within and across user types

Little room to distinguish among platforms

Multi-homing rare – costly for end users, application developers, advertisers to use more than one platform

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Understanding platforms

Externalities and network effects in ecosystems

Winner-Take-All Effect

Elements of platform strategy

Analytics

Pla

Agenda

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Add Firms with Facebook Connect

Users

Platform

Services to Platforms: Facebook

Firms

Core Service: Help users stay connected or reconnect

Monetization: Need the other side

Apps Ads Enable Ads

Restricted (edu) access drove adoption

Enable Apps (APIs)

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Open Platform to 3rd Parties

Platform Provider

Custmr Dvpr

Platform Sponsor

Avoid Vertical Integration and avoid “going it alone.”

Four ways to aid your ecosystem:

• Application Programming Interfaces (APIs)

• System Development Toolkits (SDKs)

• App Store (like iTunes or App Exchange)

• Recommender Systems

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− 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.''

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Benefits of Openness Harness 3rd party innovation. “Partners have ideas we have not considered.” Successful projects increase the size and value of the market.

Share risk. Not every project will succeed; add a cushion for the platform sponsor who cannot afford to conduct all market experiments alone.

Creates an additional revenue streams that further enhances the value of the platform.

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Maintain Control “A platform needs one controlling party, services supporting an ecosystem, you must help partners monetize, leveraging foundation to facilitate partner-to-partner interaction, build network effects. Need enabling technology and an economic model with shared risk. Not optimizing just your own pocket”

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Identifying choke points that matter PC – OS, applications, microprocessor

Telecom – CPE equipment, physical pipe (last mile), billing

Enterprise Rent-a-Car – Insurance and body shop relationships, neighborhood locations

Online retail (Amazon.com) – customer base, distribution infrastructure, affiliate relationships

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Functions Serve as Control Points

Apple’s original iPod did 1 thing

Apple’s iPhone did many things

Only the latter needs to be open. So how to make this work…

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Functions Serve as Control Points Apple iPhone has email, calendar, contacts, browser, movies, etc.

These apps are built from functions:

• Video, multi-touch screen, wifi, camera & scanner, processor,+++

Apple exerts control through store access, placement, quality rvw

Market access

Support

Information access

Incentives

Sanctions (Scholten & Scholten, 2011)

Platform Control Point Examples

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Mobilizing the Ecosystem Sounds good in theory, but how?

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Quote …you need to invest a little bit at the beginning to make the platform bigger and customers want to benefit because they know that the platform is new and want to benefit from early stage offers. On supplier side … Have to make attractive for supplier to contribute in the same ratio he benefits from the platform

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Seeding to solve chicken-and-egg

Only the latter needs to be open. So how to make this work…

Seeding: Pull services or content onto your platform (Marquis users)

• Adobe help launched PDF getting tax forms online.

• Government saved printing and postage

• Consumers got ready access to documents

Seed from existing products & services

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Use 2-sided Pricing to Drive Adoption

Only the latter needs to be open. So how to make this work…

Platform

User Dvpr Dvpr Dvpr User User

Do not charge content creators/developers for access to the platform. Adobe, Apple, and even SalesForce all made this mistake!

Do not price to marginal cost or price to extract the most revenue from a given user group.

Instead, price to drive adoption, maximizing revenues across both sides of the platform.

Adobe: Subsidize Consumers

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Understanding platforms

Externalities and network effects in ecosystems

Winner-Take-All Effect

Elements of platform strategy

Analytics

Pla

Agenda

• A same-side effect for each side, i.e., preference regarding number of other users on own side

• A cross-side effect in each direction, i.e., preference regarding number of users on other side

Platform

Side 1 Side 2

Platform Analytics

1. Help customers benchmark themselves

Platform

Custmr Devlpr

1 2 3

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2. Help developers benchmark themselves 3. Help customers find developers 4. Help developers find customers

Platform Analytics

5. Help platform identify common features for the next version

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Analytics Does there exist a solution for feature x?

Develop technology to browse components and how they interact.

Search by business area, vendor, popularity, age

Convert prospects into customers. Help “consummate the match”

Customers don’t tell their competitors how great your product is, instead, like Amazon, show customers who bought A that they might want B.

Tool to know size of the opportunity. How big is market?

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Platform firms large/growing part of GDP

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Background & Contact Info • G. Parker, M. Van Alstyne (2000). “Information Complements, Substitutes, and Strategic Product Design.” SSRN.

• A. Gawer, M. Cusumano (2002). Platform leadership: How Intel, Microsoft, and Cisco drive industry innovation. Harvard Business School Press.

• A. Gawer, M. Cusumano (2002). “The elements of platform leadership,” MIT Sloan Management Review

• G. Parker, M. Van Alstyne (2005). “Two-Sided Network Effects: A Theory of Information Product Design.” Management Science.

• T. Eisenmann, G. Parker, M. Van Alstyne (2006). “Strategy for Two-Sided Markets,” Harvard Business Review.

• A. Gawer and M. Cusumano (2008). “How Companies become Platform Leaders.” MIT Sloan Management Review

• A. Gawer, (2009). Platforms, Markets, and Innovation. Elgar.

• G. Parker, M. Van Alstyne (2009). “Six Challenges in Platform Licensing and Open Innovation.” Communications and Strategies.

• G. Parker, M. Van Alstyne (2009). “Opening Platforms: How, When & Why” Ch. 6 in Gawer, A. (ed) Platforms, Markets and Innovation.

• M. Cusumano (2010). Staying Power: Six Enduring Principles for Managing Strategy and Innovation. Oxford University Press.

• M. Cusumano (2010). The evolution of platform thinking. Communications of the ACM.

• T. Eisenmann, G. Parker, M. Van Alstyne. (2011) “Platform Envelopment.” Strategic Management Journal.

Geoffrey Parker gparker@tulane.edu, gparker@mit.edu

Marshall Van Alstyne mva@bu.edu, marshall@mit.edu