Platforms Transitions

Product to Platform & OpenBusiness ModelsGeoffrey Parker Marshall Van AlstyneTulane University & MIT Boston University & [email protected] [email protected], [email protected]

mailto:[email protected]



2© 2013 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

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


The Product Business Model is BrokenIn 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

© 2013 Cisco and/or its affiliates. All rights reserved.13


How would you create a platform around spice?



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

2. Get consumer preferences

3. Match to best recipes4. Mix new combinations,

help users create & upload, allow ratings, build a community

How would you create a platform around spice?



Create a whole geometry of flavor combinations

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

18

• 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 platformSystem must provide a useful and embeddable function or service and provide 3rd party access.

Examples:iTunes: get music onto iPodSAP: execute ERP systemsFacebook: connect family, friends & acquaintancesSmart Grids: capture AC/DC sources, route powerNike Fuel: motion capture and social benchmarking Pearson: match people to content, deliver content, certify learning

Products have featuresPlatforms have communities

How do traditional linear business models transition to platforms given

network effects?

21

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

22

Traditional Supply Chain

Biz

$ $

Biz

$

Biz Cust

Potential B2B PlatformPotential B2C Platform

23

Potential B2C Platform

BizBiz Cust

Potential B2C Platform

Biz

Biz Cust

1. Make your business a platform by facilitating transactions across your systems.

24

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 CustCust

25

This is a really, really different business model due to network effects…

How are these related?

eBay SellersAirlines/Hotels

Xbox DevelopersVisa Merchants

DoctorsYouTube Videographers

AirBnb RoomsElectric Car Charge Stations

Mechanical Turk LaborersMonster EmployersAndroid Developers

eBay BuyersTravelers

Xbox GamersVisa CardHolders

PatientsYouTube ViewersAirBnb Renters

Electric Car DriversMechanical Turk JobsMonster Employees

Android Users

Each Side Attracts More of the Other

27

Biz CustBizBiz CustCust

Platform

Pric

e

Quantity

Pric

e

Quantity

Market Biz Market Cust

q1 q2

p1 p2


28

Setting Price on a Network Platform

Platform

Pric

e

Quantity

Market One

q1

p1

29


Platform

Pric

e

Quantity

Market One

q1

p1

Pric

e

Quantity

Market Two

q2

p2

30

Pric

e

Pric

e

Market One Market Two

Quantity Quantityq1

q2p1

p2

Platform

p1

q1

p2

q2


31

Pric

e

Market Two

Quantityq1

p1

p1

q1

Pric

eMarket One

Quantityq2

p2

p2

q2

Platform


32

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?

34

Apple iPod pre-Platform

Apple iPod

$ $

Retailer Music ProducerListener

$

(1) Product First Thinking(2) Standard linear value chain (3) User bought music retail (or P2P)(4) Minimal network effects

35

Apple iPod combined with iTunes

Apple iPod

$ $

Retailer Music ProducerListener

$

36

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

MicrosoftSonyNokia

Apple has vastly stronger network effects.Sony could have done this – has many great standalone products.Google is not making this mistake with Android

0.32

0.47

0.21

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.

PolycomSpeakerphone

R1P1 U1 R1P1 U1

CiscoFlip Camera

R1P1 U1

HPCalculator

Photo

Usr Upld

Flickr

Blkbry

Usr Dvpr

RIM

eRdr

Usr Upld

Sony

Why Apple isn’t killing KindleWe 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.”

© 2011 Eisenmann, Parker & Van Alstyne

Open (fragmented) versus Closed (integrated)

?

© 2011 Eisenmann, Parker & Van Alstyne

43

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

44

− 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

RacecarFlour Mill

Mobile ChurchFord Model T

SnowmobileSawmill

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

47

What does controlling openness mean?

Split IP rights from point of customer contact.

1) Open Access2) Extend Platform3) Touch Customers4) Change Platform

Platform Provider

Side 1 Side 2

Platform Sponsor

Side 1 Side 2

Platform Provider

Platform SponsorPlatform

Models for Organizing Platforms

Dell

Users Dvprs

Acer …H

PRed

Hat

Debian

Ubuntu

…

4) Shared: e.g. Linux

Users Dvprs

Sponsor2) Licensing: e.g. Google

Android

Providers

One Provider Many Providers

3) Joint Venture: e.g. Orbitz

Sponsors

Users

Provider

Dvprs

Users Dvprs

ProviderSponsor

1) Proprietary: e.g. Mac

One Sponsor

Many Sponsors

49

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

50

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

51

For real profits, control full layer

Dell

Users Dvprs

Acer …H

PRed

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

52

Danger!

Users Dvprs

Sponsor

Watch for new control points closer to

customer.

Providers

Microsoft fear of

Netscape

Facebook fear of

Instagram

AT&T fear of Apple

Applefear of

Google Maps

SAPfear of

ADP

Should Apple have opened the iPod?

53

No! It does 1 thing only, so make it “insanely great” and own it.


valuable apps


“Long Tail”

Should Apple have opened the iPhone?


valuable apps


“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-booksExample: 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.

• Thingiverse is a digital space to upload new designs

• Users have submitted product improvements that can be printed on the platform itself

• Tested & user reviewed features become std

MakerBot: A self-evolving Platform


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

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

2. Categories are sharp3. Weapon is cost

leadership or product differentiation

4. 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





3. Competition is multi-layered, more like 3D chess.



3. 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

Where do threats come from?

65Porter’s 5 Forces – Compliments of Wikipedia

ProductFeatures

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

NetworkUsers

PlatformProviders 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.

Platform Ecosystem Rules

68

• 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

THANK YOUQUESTIONS & DISCUSSION


[email protected] Twitter: @InfoEcon

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Platforms Transitions