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
• 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
3
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?
Traditional Supply Chain
Supply
Manufacture
$
Assemble
$
Retail
$
(1) Value accumulates from stage to stage
(2) Standard linear value chain
(3) Logistics optimize stuff (usu. not incentives)
(4) No network effects
6
Traditional Supply Chain
Biz
Biz
Biz
$
$
$
Potential B2B Platform
Potential B2C Platform
7
Cust
Potential B2C Platform
1. Make your business a platform by facilitating transactions across your systems.
Biz
Biz
Biz
Cust
Cust
Potential B2C Platform
Biz
8
Creating a B2C Platform
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 Biz Biz
CustCustCust
Biz
9
This is a really, really different
business model due to network
effects…
10
How are these related?
eBay Sellers
eBay Buyers
Airlines/Hotels
Travelers
Xbox Developers
Xbox Gamers
Visa Merchants
Visa CardHolders
Doctors
Patients
YouTube Videographers
YouTube Viewers
AirBnb Rooms
AirBnb Renters
Electric Car Charge Stations
Electric Car Drivers
Mechanical Turk Laborers
Mechanical Turk Jobs
Monster Employers
Monster Employees
Android Developers
Android Users
Each Side Attracts More of the Other
Creating a B2C Platform
Market Two
Price
Price
Market One
Biz Biz Biz
p1
p2
q1
q2
Quantity
Platform
12
CustCustCust
Quantity
Creating a B2C Platform
Market Two
Price
Price
Market One
p2
p1
p1
p2
q1
q2
q1
Quantity
Platform
13
q2
Quantity
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.
14
Why do platforms beat products?
Apple iPod pre-Platform
Apple iPod
Listener
$
Music
Producer
Retailer
$
$
(1) Product First Thinking
(2) Standard linear value chain
(3) User bought music retail (or P2P)
(4) Minimal network effects
16
Apple iPod combined with iTunes
Apple iPod
Listener
$
17
Music
Producer
Retailer
$
$
Apple iPod post-Platform
User
Content
$$
Apple
(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
18
How Apple is killing standalone platforms
2007
Usr
Today
$30/share
User
Dvpr
$4/share
2007
Today
Usr
Gam
$53/share
Usr
$23/share
Mus
Lumia
PSP
Zune
Nokia
Sony
Microsoft
User
Calls
Music
MP3
Video
TV
Games
Dvpr
Web
HTML
eBooks
Apple has vastly stronger network effects.
Sony could
have
– hasthis
many
greatwith
standalone
Google done
is not this
making
mistake
Androidproducts.
Message for you: A great standalone product might not be sufficient.
Publi
How Apple is killing standalone platforms
Usr
P1
R1
Upld
U1
Polycom
eRdr
Speakerphone
Sony
User
R1
Usr
P1
Upld
U1
Cisco
Photo
Music
MP3
Video
TV
Games
R1
Dvpr
U1
HP
Blkbry
Calculator
RIM
Flip Camera
Flickr
User
Calls
Usr
P1
Dvpr
Web
HTML
eBooks
Message for you: A great standalone product might not be sufficient.
Publi
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
User
User
Calls
Music
MP3
Video
TV
Games
Dvpr
Web
HTML
Publi
eBooks
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.”
© 2012 Parker & Van Alstyne
Firms generally consider product feature overlap
(differentiation?) to find and benchmark competition.
Product
Features
Zune / iPod
Zune / Sony PSP
Zune / iPhone
Eisenmann, Parker, Van Alstyne, “Platform Envelopment.” Strategic Management Journal, 2011.
User overlap between Platforms predicts competitors.
Size (usually but not always) predicts victor.
Network
Users
Platform
Providers
T
A
High Overlap
T
A
Low Overlap
T
A
Asymmetric Overlap
Eisenmann, Parker, Van Alstyne, “Platform Envelopment.” Strategic Management Journal, 2011.
Open (fragmented) versus
Closed (integrated)
?
© 2011 Eisenmann, Parker & Van Alstyne
Openness vs. Control
Maximum protection ≠ Maximum Value
Your Share
Proprietary
Open
Industry Value Add
Your reward = (Value added to industry) x (Your share)
27
on: Shapiro
& Varian
‘99
© Based
2011 Eisenmann,
Parker
& Van Alstyne
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.''
Open to developers −
Open gift store −
− Open to “.com”
The Rise & Ignominius Fall of MySpace – Business Week 2011
28
Historical Open Innovation
Ford Model
T
Mobile
Church
Flour
Mill
Sawmill
Goat
Hay Carrier
Carrier
Racecar
Snowmobile
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”
You don’t need to
own this
Consider an operating system like MS Windows, Apple Mac, or Google Android
What does controlling openness mean?
Split IP rights from point
of customer contact.
Side 1
Side
Side 22
Platform Provider
Platform
Platform Sponsor
1) Open Access
2) Extend Platform
3) Touch Customers
4) Change Platform
31
Models for Organizing Platforms
One Provider
Users
One Sponsor
Dvprs
Users
Dvprs
Provider
Providers
Sponsor
Sponsor
1) Proprietary: e.g. Mac
2) Licensing: e.g. Google
Android
Users
Users
Dvprs
Provider
Many Sponsors
Many Providers
Sponsors
3) Joint Venture: e.g. Orbitz
D
ell
…
Dvprs
Ac
er
Re
d
Ha
t
H
P
De
bi
an
…
U
bu
nt
u
4) Shared: e.g. Linux
Apple tried to control too much of the
original Mac
Users
Claris
Apple Mac
Mac OS
• Remember MacWrite,
MacPaint?
• Charged ~$10,000 for
SDKs.
• Controlled OS & HW
and dominant Apps.
• Vertical integration
choked network effects.
33
Microsoft opened much more of its
ecosystem
Users
Del
l
Dvprs
IBM
…
• Microsoft had 6-10X
developers
• Open APIs / Cheap SDKs
• Controlled OS, licensed.
• Strong network effects.
HP
MS Windows
34
For real profits, control full layer
Users
D
ell
…
Dvprs
Ac
er
Re
d
Ha
t
H
P
De
bi
an
…
U
bu
nt
u
Linux:
No one driving the bus.
Limited scope of
control.
Users
Flights
Users
Dvprs
Provider
Sponsors
Providers
Joint Venture:
e.g. Orbitz airline
collaboration
Licensing:
e.g. Google Android
Sponsor
35
Danger!
AT&T fear of Apple
Microsoft
fear of
Netscape
SAP
fear of
ADP
Users
Dvprs
Providers
Sponsor
Facebook
fear of
Instagram
Apple
fear of
Google Maps
Watch for new control
points closer to
customer.
36
Should Apple have opened
the iPod?
Most firms can only
concentrate on most
valuable apps
Profits increase when
others add to platform’s
“Long Tail”
No! It does 1 thing only, so make it “insanely great” and own it.
37
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.
Value Added
Why Platforms Beat Products
Time
• 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.
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 to
unexpected innovation, but don’t open both.
• Look to your overlapping users to see where tough
competitors will attack
43
Thank You!
Questions & Discussion
marshall@mit.edu,
gparkter@tulane.edu
Twitter: InfoEcon
© 2011 Eisenmann, Parker & Van Alstyne