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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
4
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
5
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
6
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
7
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
8
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
10
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
11
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
12
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
15
• 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
16
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!
17
DAVID S. EVANS
Market Platform Dynamics | Founder
david.evans@marketplatforms.com
Mobile: +1 617 320 8933
Skype: david.s.evans
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