platform strategy & open business models
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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
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
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