CATALYST CODE:

HOW TO IGNITE A PLATFORM BUSINESS AND RULE A

PLATFORM-CENTRIC ECOSYSTEM

20 April 2012 Catalyst Course 2012

David S. Evans Founder | Market Platform Dynamics

Visiting Professor | University College London

Lecturer | University of Chicago

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Catalyst Competition: 2

How to Survive, Compete and Disrupt in a Multi-

Dimensional Ecosystem

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The Winner-Take-All Myth in Platform Markets Most platforms operate in competitive ecosystems

3

Long-lived platform monopolies are rare

• Many successful platforms face direct competition

Positive feedback effects don’t insure

a single winner

• They limit the number of successful firms but multiple platforms survive by appealing to different types of customers on both sides

Positive feedback effects work in

reverse

• They drive rapid growth but competition can lead to a death spiral when they work in reverse

Only the Smart Worrywarts Survive

The MySpace “Monopoly” Leaders often seem entrenched until they aren’t

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The long-lived Windows dominance on PCs is the exception to the rule that

platform markets usually aren’t winner take all.

Facebook Friendster MySpace

2011 Social Network Analysis Report, http://www.ignitesocialmedia.com

“MySpace is far and away the

de facto standard for social

networking and is highly

entrenched in the youth culture of

today.”

IMEDIACONNECTION, 2006

MASHABLE, 2006

“We see MySpace as the new

MTV, with one crucial difference:

the users are the stars.”

Symmetric vs. Asymmetric Competition Multi-dimensional nature of platforms results in new concepts of competition

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Symmetric Competition

• Competitors have same number of sides and types of users

• Competitors have similar pricing structures including decisions on money vs. subsidy side

Asymmetric Competition

• Rival has extra side(s); both have same side but one has a different one

• Rival has one side in common but one side different

• Rival has radically different pricing structure

Examples of Asymmetric Competition

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Enveloping Platform

Rival has extra side

• Microsoft has 2-sided user/developer software platform

• Google had 2-sided search/advertising platform plus 2-sided user/developer software platform

• Google could provide free software, Microsoft couldn’t because that was rev source.

Intersecting Platforms

Rival has different side

• Tencent provides IM for users, sells advertising

• Qihoo provides anti-virus software for users, sells advertising

• They compete for users by providing different products to attract users but both looking to sell advertising

Different Pricing

• Google provides free software to users, Microsoft doesn’t

• nytimes.com charges viewers, cnn.com doesn’t

• Developers don’t pay to develop PC games, but do to develop console games

Overtaking the Leader When Competing on the Same Sides Entrants have several strategies for displacing or at least competing with the leader

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Differentiate by serving subsets of users on each

side better

Feature competition that increases value platform

participants can exchange—better search, matching, and exchange

Identify better pricing structures that create

stronger positive feedback effects

• Square entered by identifying tiny merchants and cash users

• New financial exchanges succeeded through more efficient computerized trading mechanisms

• Munsey Magazine in late 19th century dropped prices dramatically to users thereby dramatically increasing demand for advertising.

Enveloping the Leader by Adding a New Side Adding another side encircles the incumbent platform and boxes the leader in

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Major disruptive innovation involves bringing another side to a platform

Provides another source of value to existing sides

Enables n+1 sided platform to lower prices/increase value to the n-sides of the incumbent

Android enveloped iPhone initially

because it had the prospect of search-

ad revenue and therefore could enter

at a low price

Envelopment Strategy Adding a side can surround a rival platform

9

Deve

lop

ers

Users

Staying in the Lead when Competing on the Same Sides Incumbents can keep the competitors far away—or at least try

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Feature competition

• Keep adding and improving features that increase the value platform participants can share in

Focus on strategies that make it hard for new

firms to attract customers

• Make one or more sides very sticky via platform-specific investments

• Create a side that requires platform-specific investments

• Example: applications are sticky and are hard for entrants to duplicate quickly

Lock up liquidity

• Make if difficult for competitors to attract critical mass by

• Locking up customers on one or both sides with long-term contracts or

• Making customers very sticky

Most of all keep growing on both sides as this increases value of platform

compared to all followers

Staying Ahead When Rivals Go Asymmetric Asymmetric competition is highly treacherous for incumbents

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Differentiation Create value prop so strong that lower price of rival doesn’t matter

(WSJ creates unique value so it can charge subscribers)

Price discrimination—lower price to customers most at risk

Expand Platform to Achieve Symmetry

Integrate into additional side to compete directly

(e.g. Apple into ads, Google into hardware)

Expand Platform to Achieve Another Revenue Stream

Integrate into a new side that rival lacks but than can provide similar offsetting revenue

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Only the (Smart) Worrywarts Survive Successful platforms are tough but not impossible to beat

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Constantly worry about the

competition; no matter how successful you are it is possible for you to lose your

lead

A rival has even faster

positive feedback

loops

You have a reverse positive

feedback

loop

Not so clear the paranoid survive

Be smart about what you worry about and

how you react

The Microsoft Syndrome: paranoia

over every possible platform

competitor resulted in

missing major disruption

Lots of rivals have no

chance of success and you shouldn’t waste effort

Realistic assessment of

who could overtake you

Focus a lot on competition

from the n+1 dimensions

Catalyst Conclusion 13

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© Market Platform Dynamics & Evans & Schmalensee, The Catalyst Code (HBS Press, 2007)

The Catalyst FrameworkTM

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Concluding Thoughts

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• All about solving pain points between agents

• Can have explosive growth through positive feedback

• Hard to design because solving many masters

• Hard to ignite because coordination makes it difficult to achieve critical mass

Catalysts can create tremendous value for themselves and their customers

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For More Detail and Background Catalyst Reading List

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Evans and Schmalensee, Catalyst Code: The Strategies Behind the World's Most Dynamic Companies Harvard Business School Press.

Evans, Platform Economics, CPI Press.

Evans, “How Catalysts Ignite: The Economics of Platform-Based Startups,” in Gawer, Platforms, Markets, and Innovation, Elgar Publishing, 2009.

Evans, Launching New Payments Businesses: The Role of Critical Mass and Ignition Strategies, PYMNTS.com, 2010.

www.catalystcode.com

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Thank You!

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DAVID S. EVANS

Market Platform Dynamics | Founder

david.evans@marketplatforms.com

Mobile: +1 617 320 8933

Skype: david.s.evans

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