Platform Shift: How New Business Models Are Changing the Shape of Industry

Barcelona, Spain • October 29-31, 2013

© 2014 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: [email protected] :: PlatformEconomics.com

Marshall Van AlstyneBoston University & [email protected]@twitter.com

Platform Shift: How New Biz Models Are Changing the Shape of Industry

MIT Industrial Liaison Program April 24, 2014

2© 2014 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: [email protected] :: PlatformEconomics.com

InterBrand: 2013 Best Global Brands


These Grew Fastest


These are Platforms


Platform Firms Becoming More Important in Economy

3 of top 5 firms in 2013 by market cap.

FIRM MARKET CAPApple 474

Exxon Mobile 433

Google 361

Microsoft 332

Berkshire Hathaway 314


Platform Firms Becoming More Important in Economy

% of top 20 firms by market cap since 2001

Percentage of Platform Firms weighted by MKT CAP (2001-2013)

35%

30%

25%

20%

15%

10%

5%

0%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

MKT

CAP

Wei

ghte

d Pl

atfo

rm

Firm

s


The Product Business Model is Broken



The Product Business Model is Broken

In 2009, BlackBerry had nearly 50% market share in U.S. operating systems, according to

IDC. Now: 2.1%

2008 2009 2010 2011 2012 2013

50%

40%

30%

20%

10%

0%


1980-2000 Microsoft Platform Beats Apple Product

Apple launched the PC revolution but Microsoft licensed widely, built a huge developer ecosystem, 6X

larger.


Apple Feb 5, 1996

Michael Dell - ”Shut it down and give the money back to the shareholders.”


Interbrand: 2013 Best Global Brands


Nike Builds a Biz Platform

13

14

1. Enumerate embeddable features: salty, citrus, sour, toasted, …

2. Get consumer preferences3. Match to best recipes4. Mix new combinations, help users

create & upload, allow ratings, build a community

How would you create a platform around spice?


15

Create a whole geometry of flavor combinations


To Be a Platform

The system must provide a useful function or service and

allow 3rd party access.

Examples:iTunes: get music onto iPod

SAP: execute ERP systems

Facebook: connect family, friends & acquaintances

Cisco Smart Grids: capture AC/DC sources, route power

Nike Fuel: motion capture and social benchmarking

Products have features, Platforms have communities


How are these Related?

Each Side Attracts More of the Other

eBay BuyersExpedia TravelersXbox GamersAmex CardHoldersAga Khan PatientsYouTube ViewersAirBnb RentersElectric Car DriversMechanical Turk JobsLinkedIn EmployeesAndroid Users

eBay SellersExpedia Airlines/Hotels

Xbox DevelopersAmerican Express

MerchantsAga Khan Doctors

YouTube VideographersAirBnb Rooms

Electric Car Charge Stations

Mechanical Turk Laborers

LinkedIn EmployersAndroid Developers

More Amex Users… get more Amex Merchants…

More Amex Merchants… get more Amex Users…


More Android Users… get more Android Developers…

More Android Developers… get more Android Users…


Why Platforms Beat Products Every Time



Apple iPod pre-Platform

(1)Product First Thinking(2)Standard linear value

chain

(3) User bought music retail (or P2P)(4) Minimal network effects

Music Produce

rListen

erApple iPod Retailer

$ $ $


Apple iPod Combined with iTunes

Music Produce

rListen

erApple iPod Retailer

$ $ $


Apple iPod post-Platform

(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

$$User Conte

nt

Apple


Sony could have done this. It has many great standalone products.Google is not making this mistake with Android

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

MicrosoftSonyNokia

Apple has vastly stronger network effects.


Zune

Usr Mus

Microsoft


Lumia

Usr Dvpr

PSP

Usr Gam

MP3

User

Music

Video

TV

Games

Dvpr

Web

HTML

eBooks

Publi

Calls

User

SonyNokia

So what happened?

2007

Today

$30/share

$8/share

2007

Today

$53/share

$19/share


Message for you: A great standalone product is not sufficient.

PolycomSpeakerphone

R1P1 U1 R1P1 U1

CiscoFlip Camera

R1P1 U1

HPCalculator


MP3

User

Music

Video

TV

Games

Dvpr

Web

HTML

eBooks

Publi

Calls

User


MP3

User

Music

Video

TV

Games

Dvpr

Web

HTML

eBooks

Publi

Calls

User

Photo

Usr Upld

FlickrBlkbry

Usr Dvpr

RIMGPS

Usr Upld

TomTom


Message for you: A great standalone product is not sufficient.

© 2012 Zimedia

Why Apple isn’t Killing Kindle: Amazon Ecosystem



You can’t make calls …

Why Apple isn’t killing Kindle

MP3

User Music

Video

TV

Games

Dvpr

Web

HTML

eBooks

Publi

Calls

User

unless you load Skype.

Monetizing Platforms Means Free Pricing is Profitable

What changes? Prices



To Price a Platform with Network Effects, Who Gets the Subsidy?


If markets are independent, collect profits in both.

Pric

e

Quantity

Market One

q1

p1

Pric

e

Quantity

Market Two

q2

p2


But if markets are coupled, discounting one builds demand in the other.

Pric

e

Market One

Quantityq1

p1

p1

q1

Pric

e

Market Two

Quantityq2

p2

p2

q2

© 2014 Van Alstyne All rights reserved. 34

Two Sided Network Effects are Very Robust


Additive

Additive Recursive

Multiplicative

Multiplicative Recursive

Shifted Multiplicative

Elasticity and spillover properties hold for any of these functional forms:

See Parker & Van Alstyne “Two Sided Networks: A Theory of Information Product Design” Management Science 2005

http://ssrn.com/abstract=1177443


There are 2 types of Free

1) Cellphones & Minutes, Razors & Blades

2) eBay, Amex, Google, Amazon all use 2-sided platform pricing.

Platform

Group 2Group 1

Platforms Unlock New Value from Spare Resources

and User Generated Content

What Changes :: Supply Chains


AirBnb sells users’ spare rooms, competing with hotels that must own

them

RelayRides sells users’ spare cars, competing with rental firms that must own them


Instagram sold for $1B not because

of contributions from 13 employees but from 30 million

users



2005


Employees Must See Across the Platform, which Must Support a Shared Data Layer

What Changes :: Internal Organization


Sony was a virtual Galapagos of

holding companies


43© 2014 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: [email protected] :: PlatformEconomics.com © 2013 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: [email protected] :: PlatformEconomics.com

1. All teams will expose their data…

2. Teams must communicate through interfaces.

3. … no other form of interprocess communication allowed

4. Interfaces, without exception, must be externalizable.

5. Anyone who doesn’t do this will be fired.

Bezos Platform Mandate


Platforms Open Themselves to Third Party Contributions

What Changes :: Innovation


A platform is a system that can be… adapted to countless needs and niches that the platform’s original developers could not possibly have contemplated…”

Mark Andreeson: Venture Capitalist, Netscape Founder, Board HP, eBay © 2013 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: [email protected] :: PlatformEconomics.com


It’s Working when Users do Something You Didn’t Expect

Hay Carrier

RacecarFlour Mill

Ford Model T


It’s Working when Users do Something You Didn’t Expect

Snowmobile

GoatCarrier

Sawmill

MobileChurch


− Open to .com”

Open to developers −

The Rise & Ignominius Fall of MySpace – Business Week 2011

Does Openness Work?


The Rise & Ignominius Fall of MySpace – Business Week 2011

‘‘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.’’

Does Openness Work?


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

Platforms Get Enormous Value from 3rd Party Developers


Consider product innovation alone

Harnessing 3rd party resources, innovation occurs at a higher combined rate

Even if a platform starts behind, its value will overtake the product leader

Shed costs, keep 30% gains!

Why Platforms Beat Products

Time

Valu

e Ad

ded

Platforms will Displace Gatekeepers with Meritocratic Crowds

What Changes :: Industry Bottlenecks



Advice from Travelers Replaces

that of Travel Agents

Video Production and Curation Moves to

Viewers from TV Station Staff© 2013 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: [email protected] :: PlatformEconomics.com

Bypass editors. Twitter lets everyone be a reporter and RT

tells what’s important.

Forget product buyers. Threadless uses crowd

votes to predict / guarantee sales.© 2013 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: [email protected] :: PlatformEconomics.com

Goal shifts from control, entry barriers, and differentiation to more valuable market

exchanges.

What Changes :: Strategy


1. Goal is a protected market niche, emphasizing industry barriers

2. Categories are sharp3. Weapon is cost leadership

or product differentiation4. Inimitable resources you

own provide sustained advantage

Porter’s Five Forces & Resource Based View


Platform Strategy Differs


1. Goal is transactions volume & creating customer value. Network effects provide sustainability.




2. Boundaries can be altered




2. Boundaries can be altered3. Competition is multi-

layered, more like 3D chess.


2. Boundaries can be altered3. Competition is multi-

layered, more like 3D chess.4. Don’t need to own

inimitable resources. Have them to join you!



Owned / inimitableresources

Profits increase when others add to platform’s

Long Tail

You don’t need to own this

What’s Next?



City as Platform


Energy/Smart Grid as Platform


Education as Platform

67© 2014 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: [email protected] :: PlatformEconomics.comHealthcare as Platform


If you believe in the power of people connecting, embrace the platform.If you convert your product/service to platform, what would it do?


THANK YOUQUESTIONS & DISCUSSION


[email protected] Twitter: @InfoEcon

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Platform Shift: How New Business Models Are Changing the Shape of Industry