Business models in two-sided markets: an assessment of strategies for app platforms

Business models in two-sided markets:

an assessment of strategies for app

platforms

ICMB Delft

Iana Kouris, Robin Kleer

RWTH Aachen University, Germany

Agenda

▪ Introduction

▪ Background and literature review

▪ Strategies for app platforms

▪ Discussion and conclusion

1

Internet-based platforms are reshaping life in the 21st century

Consider technology platforms such as Amazon Web Services, Google

Apps, Android, Facebook, Twitter, the iPhone App Store, and now the

iPad... Just as the telephone, automobile, and aeroplane reshaped society in

the first half of the 20th century, the digital infrastructure is reshaping life

in the 21st.

Financial Times, 22 September 2010

“

” 2

Focus on app platforms but main insights are applicable to other (internet-based) platforms.

Based on the two-sided market theory and platform management literature as well

as assessment of key stakeholders we analyze strategies in the app platform

industry

Key stakeholder

▪ App platforms

▪ Developer

▪ User

Theory

▪ Platform management,

e.g., Gawer and

Cusumano (2008),

Eisenmann (2007)

▪ Two-sided markets

theory, e.g., Rochet and

Tirole (2003, 2006),

Armstrong (2006)

Strategies for

app platforms

3

Agenda

▪ Introduction




4

Platform management literature concentrates on practical guidelines, providing no

/ little theoretical background

▪ Main research directions:

▪ Network analysis

▪ Platforms as bottlenecks (Eaton et al., 2010)

▪ Positive and negative effects of gate keeping position (Baldwin

and Clark, 2006)

▪ Platform competition

▪ Platform leadership (Gawer and Cusumanu, 2008)

▪ Entrant strategy: Platform envelopment (Eisenmann et al., 2007;

Hidding et al., 2011)

▪ Management of complementors

▪ Balance between encouraging entry, innovation / extract money

(Gawer and Henderson, 2007)

▪ Innovation and open access (Parker and van Alstyne, 2009;

Boudreau, 2010)

5

Two-sided market theory

“On two-sided markets, platforms intermediate transactions between two groups of

agents valuing each other's presence.” – Tag (2008, p. 5)

The three key characteristics of two-sided markets are (according to Weyl, 2009, p. 4)

▪ Price discrimination between two distinct groups of users

▪ Cross network effects between market sides

▪ Bilateral market power of the platform

“

”

Platform

Buyers (B)Sellers (S)

6

App platforms can be analyzed using two-sided market theory

▪Key players are AppStore, Android Market, Blackberry, Windows

Mobile

▪Total Revenue USD 4 billion in 2011 (and growing)

▪Different roles of platforms (operator, dealer, infomediary, trusted

third party (Belleflamme and Peitz, 2010))

▪Native/integrated plaforms, pure mobile device manufacturers,

mobile network operators, independent

▪Program apps and provide them (via one ore multiple platforms)

▪Different pricing strategies (simply buy, in app purchase, financed

through advertisement)

▪Attract customers via versioning (lite vs. prime), free trials,

personification

App Platform

(=Platform)

Developers

(=Seller)

Users

(=Buyer)

▪Access to platform via mobile device

▪Mobile device and apps are complementary goods

▪Provide rating of apps

▪Different customer segments (Apple, Blackberry vs. Android)

7

Two-sided markets literature provides valuable theoretical insights

SOURCE : Parker, J.J. und Van Alstyne, M.W. (2005) Two-Sided Network Effects, Management Science 51(10), pp. 1494–1504

PBNew

PBOld

DBNewDBOld DSNewDSOld

PSOld

PSNew

Number of

sellers

Number of

sellers

FeesFees

Buyer market sideSeller market side

8

Economic literature on two-sided markets focuses on theoretical analysis

▪ Main research directions:

▪ Extensions of the basic model by Rochet and Tirole (2003)

▪ Usage fees, membership fees (Armstrong, 2006; Rochet and

Tirole, 2006)

▪ Quality preferences (Hagiu, 2009; Jeon and Rochet, 2010)

▪ Segmentation of participants, commission payments and

adjustments for the number of interactions (Kouris, 2011).

▪ Duopoly and competitive dynamics

▪ Competitive bottlenecks (Armstrong, 2006)

▪ Tying and multihoming (Choi, 2010)

▪ Open and closed platforms (Tag, 2010)

▪ Dynamic analysis (Sun and Tse, 2007; Kumar et al., 2010)

▪ Empirical evaluation

▪ Evaluation of indirect network effects (Rysman, 2004)

▪ Non-parametric analysis of two-sided markets (Sokullu, 2010)

9

Agenda

▪ Introduction




10

We consider key strategic issues along 3 phases of a life cycle

Design phase

Launch phase

Competition

phase

Key strategic issues and decisions

11

During the design phase platform should check, if it can apply “coring”, then make

decisions regarding fees size and allocation and quality of participants


▪Check necessary criteria for a product to become a platform and

make the product core or a system (Gawer and Cusumano, 2007)

▪Decide, which side to subsidize (Eisenmann et al., 2006)

▪Usage vs. membership fees (Rochet and Tirole 2006, Armstrong

2006, Kouris 2011)

▪Check, if quality review would make sense (Hagiu, 2009)

Design phase

Launch phase

Competition

phase

12

During the launch phase platform should concentrate on getting both sides on

board, followed by decisions regarding openness and “envelopment”






2006, Kouris 2011)


▪Decide, how the platform will get both market sides on board

(„chicken & egg“ problem, Caillaud and Jullien, 2003)

▪Open vs. closed system (Rysman, 2009)

▪Use “envelopment” to attract more customers (Eisenmann et al.,

2007 and Hidding et al. 2011)

Design phase

Launch phase

Competition

phase

13

During the competition phase it is key to determine if the market is prone to

“winner-takes-all” dynamics






2006, Kouris 2011)


Design phase

Launch phase

Competition

phase

▪Decide, how the platform will get both market sides on board

(„chicken & egg“ problem, Caillaud and Jullien, 2003)

▪Open vs. closed system (Rysman, 2009)

▪Use “envelopment” to attract more customers (Eisenmann et al.,

2007 and Hidding et al. 2011)

▪ Main factors influencing „winner-takes-all-dynamics” (Eisenmann

et al., 2007, Sun and Tse, 2007):

– Cost of multi-homing

– Size of indirect network effects

– Size of the same-side effects

– Presence of demand for differentiation 14

Observations and suggestions for app platforms business models

▪App platforms managed to become core of the mobile ecosystems

(shift from hardware to software)

▪App platforms try to extract moist of their revenues from developers

▪Per transaction commission is key revenue source

▪Quality (or perceived quality) can be an important differentiation

aspect (cf. Apple)

Design phase

Launch phase

Competition

phase

▪Many app platforms leverage customers they used to have before

they started the platform: platform envelopment (iTunes for the

AppStore, Linkage to the Search platform (Google Android)

▪Battle between open and closed philosophy is not over yet (Android

vs. Apple)

▪App platform industry shows a high tendency towards convergence

but it leaves room for niche building and differentiation

▪The key issue for the incumbent app platforms is to push further for

consolidation

▪Possible challengers have to look for their niche to be successful

15

Agenda

▪ Introduction




16

Conclusion and discussion

▪ Summary

▪ Two-sided market theory (combined with management literature on

platform) provides valuable insights for business strategies in the app

platform industry

▪ Pricing, chicken & egg problem, and winner take all dynamics are the

key elements during the life cycle of a platform

▪ Further research

▪ Empirical evaluation of pricing (price elasticities, strategies)

▪ Analysis of developers and users

▪ Level of openness of platforms (collaborations among platform

providers, collaborations of platform providers with developers)

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Business models in two-sided markets: an assessment of strategies for app platforms

Technology

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