Platform Strategy: Openness, Innovation & Control

Open / Closed Platform Strategies:How, When & Why

Geoffrey ParkerFreeman School of Business, [email protected]

Marshall Van AlstyneBoston University & [email protected], [email protected]

mailto:[email protected]




MVA Information Economics Research

Platforms &Network Effects

CommunicationsMarkets

Information &Productivity

Economics ofIP

Why we are here today

How can firms such as IBM, AT&T and others create nonlinear shareholder value from platforms in ways that Apple, Google, Facebook and Salesforce.com do?

1981-1997 Microsoft beats Apple

Apple launched the personal computer market but Microsoft licensed widely, building a huge developer ecosystem. By the time of the antitrust trial, Microsoft had more

than 6 times the number of developers.

© 2011 Parker & Van Alstyne

Apple 1996

Michael Dell “I’d shut it down and give the money back to the shareholders.”

Apple 2000

Apple passes Microsoft May 26, 2010

Using a platform strategy, Apple becomes the most valuable tech firm in the US, representing $310Bn to Microsoft’s $204Bn. Chart shows % growth.


Technology Smackdown

9

Google vs. Microsoft

vs. Apple

11


12

Network vs ComputerNetwork as the Computer Computer as the Network

Managerial Implications

• Understand: Winners in a platform market generally have the “best” platform strategy, not necessarily the “best” product

• Best platform?1. Open (but not too open) interfaces2. Modular architectures (easy to build on/extend)3. Compelling complements (generally result of vibrant ecosystem)

• Best product? Best standalone value proposition, but while starting here is good, usually not enough to win a platform market

13Source: Cusumano 2011

Decision for YOU and IBM: product strategies or platform strategies?

Agenda

Understanding platforms

Externalities and network effects in ecosystems

Winner-Take-All

Elements of platform strategy

Choke points and platform evolution

Pla

15

Ongoing Platform Battlegrounds

16

Platform Definition

A foundation technology or set of components (could also be a service) used beyond a single firm

Allows multiple parties (“market sides”) to transact across the platform

Value of the platform may increase non-linearly with more users – depends on strength of network effects.

Platform Examples

1. Desktop OS: Unix, Mac, Windows

2. PDAs: Palm, Psion, Newton

3. Game Consoles: Wii, Xbox, Playstation

4. Network Switches: Cisco, IBM, HP

5. Multimedia: Adobe/Flash, MS/Silverlight, Google-Apple/HTML5

6. Payment Systems: Paypal, Google Checkout, Visa, Apple, Mobile Felica

7. Mobile Devices: iPhone, Android, Symbian, Blackberry

8. Enterprise Systems: Salesforce, Oracle, i2, IBM, SAP

9. Social Networks: Facebook, MySpace, LinkedIn, Monster, Twitter

10.Batteries: Sony, Panasonic, Sanyo, A123

11.Web Search: Google, Bing+Yahoo!, Baidu

12.Ebooks: Amazon, iPad, Nook, Sony

13.Smart Grids: IBM etc.

14.Health Care: Microsoft, WebMD, IBM etc.

Agenda



Winner-Take-All Effect



AT&T Platforms: Breakout exercise

Pla

© 2010 Eisenmann, Parker & Van Alstyne

19

Pop Quiz: What are “network externalities?”

Hint: they matter for pricing, winner-take-all markets, and

strategy…


20

A “network externality” is a demand economy of scale.

Examples: phone, fax, IM, email networks.


21

Supply vs. Demand Scale Economies

Price

Quantity

Demand

Supply

• Rising average costs• More competitive supply• Oil, Soda, Bread

Standard Goods

Demand

Supply

• Falling average costs• Monopolistic supply• Utilities, Semiconductors

Cost Econ of Scale

Demand

Supply

• Often falling avg cost• Monopolistic supply• OS, IM, MMOG

Demand Econ of Scale

22 FAX

(Re)interpreting Network Externalities

• “Network Externalities” are demand economies of scale.

• They imply at least some level of interaction as when I email you, or you FAX or IM me.

Phone E-Mail

IMSee: Parker & Van Alstyne (2005). “Two Sided Network Effects,” Management Science.


23

Reinterpreting Network Externalities

• Where is the interaction when your neighbor rents “Lord of the Rings”?

• In fact, his rental may mean you have to wait!

24

Traditional Linear Value Chain

Stage 1 Stage 2 Stage 3

Value accumulates from stage to stageMinimal Network Effects

$ $$

Apple iPod pre-Platform

UserApple Content

$ $

(1) Product First Thinking(2) Standard linear value chain (3) User matches MP3 player to library(4) Minimal network effects


Apple iPod post-Platform

Apple

$ $User Content

(1) Triangular platform supply network(2) Apple owns financial chokepoint(3) Apple matches users to content

(4) Stronger network effects© 2011 Parker & Van Alstyne

27

A two-sided network has four network effects

A same-side effect for each side, i.e., preference regarding number of other users on own side

A cross-side effect in each direction, i.e., preference regarding number of users on other side

$ $Side 1 Side 2

Platform

28

Managing network effects often involves subsidy; Who should get it?

Pricing1. Ability to capture cross-

side effects1. Mistake of Netscape

See: Eisenmann, Parker, Van Alstyne (2006). “Strategy for Two-Sided Markets,” Harvard Business Review.


side effects

2. User sensitivity to price & quality

1. Mistake of Netscape

2. Denver vs. Boston real estate markets



side effects


3. Value added



3. Mistake of 1984 Apple



side effects


3. Value added

4. Marginal costs




4. Mistake of FreePC



side effects


3. Value added

4. Marginal costs

5. Interfering same-side effects





5. Mistake of Covisint



side effects


3. Value added

4. Marginal costs

5. Interfering same-side effects

6. Marquee users





5. Mistake of Covisint

6. Mistake of Microsoft


Agenda







Pla

Homing and Switching Costs

2 SETUPS + 2 ONGOING

1 SETUP + 1ONGOING

Mono-homing

Switching

Multi-homing

2 SETUPS + 1 TERMINATION + 1 ONGOING


When do Winner-Take-All Networks Emerge?

1. Large Supply/Demand Effects (FB vs gas engine)

2. Large Multi-Homing Costs (OS vs credit cards).

3. Niche specialization is less feasible.

Windows


How Apple is killing standalone platforms

Kindle

Usr Book

PSP

Usr Gam

MP3

User Music

Video

TV

Games

Dvpr

Web

HTML

eBooks

Publi

Calls

User

Zune

Usr Mus

MicrosoftSonyAmazon

Apple has vastly stronger network effects.



Kindle

Usr Book

PSP

Usr Gam

MP3

User Music

Video

TV

Games

Dvpr

Web

HTML

eBooks

Publi

Calls

User

Zune

Usr Mus

MicrosoftSonyAmazon

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



Kindle

Usr Book

PSP

Usr Gam

MP3

User Music

Video

TV

Games

Dvpr

Web

HTML

eBooks

Publi

Calls

User

Zune

Usr Mus

Amazon


0.16

0.62

0.22 0.32

0.47

0.21

Message for IBM: A great standalone product might not be sufficient.

Sony MS Zune


Kindle

Usr Book

PSP

Usr Gam

MP3

User Music

Video

TV

Games

Dvpr

Web

HTML

eBooks

Publi

Calls

User

Zune

Usr Mus

MicrosoftSonyAmazon

See: Eisenmann, Parker, Van Alstyne (2011). “Platform Envelopment,” Strategic Management Journal.

Agenda







Pla

Identifying choke points that matter• PC – OS, applications, microprocessor; Pheonix BIOS story

• Telecom – CPE equipment, physical pipe (last mile), billing

• Online retail (Amazon.com) – customer base, distribution infrastructure, affiliate relationships

• SAP – Access rights of developers to participate on the platform, certification, in-store sales, billing.


44

Openness vs. Control

You

r S

hare

Industry Value Add

Open

Proprietary

Your reward = (Value added to industry) x (Your share)

Based on: Shapiro & Varian ‘99

Maximum protection ≠ Maximum Value


45


You

r S

hare

Industry Value Add

Open

Proprietary

Set-Top Boxes were too closed, 3rd parties never added value.



46


You

r S

hare

Industry Value Add

Open

Proprietary

Linux is so open (viral GPL) it’s difficult to control and make money.


© 2011 Eisenmann, Parker & Van Alstyne© 2011 Parker & Van Alstyne

Does Openness Work?

What did Facebook do in early 2007?

© 2011 Eisenmann, Parker & Van Alstyne© 2011 Parker & Van Alstyne

Does Openness Work?

It opened to developers and overtook MySpace!

Why does openness work?

• Platform sponsor gives away (yellow) platform value

Price

q1

p1

Quantity

V1

Downstream enhancements add value

See: Parker, Van Alstyne (2011). “Innovation, Openness & Platform Control,” SSRN.com.



• Developers build apps for installed base, adding new layers of value.

• Benefits:– Sponsor from increased sales, and

downstream royalties.– Developer from cost savings and

installed base.

Price

q1

p1

Quantity

V1

V2



V4V3



• Developers build apps for installed base, adding new layers of value.

• Benefits:– Sponsor from increased sales, and

downstream royalties.– Developer from cost savings and

installed base.

• Repeat

Price

q1

p1

Quantity

V1

V2




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

53

What does control mean?

Split IP rights from point of customer contact.

1) Open access

2) Extend platform

3) Touch customers

4) Change platform

Platform Provider

Side 1 Side 2

Platform Sponsor

Side 1 Side 2

Platform Provider

Platform Sponsor

Platform

54

What does control mean?


1) Open access

2) Extend platform

3) Touch customers

4) Change platform

Platform Provider

Side 1 Side 2

Platform Sponsor

Side 1 Side 2

Platform Provider

Platform Sponsor

55

Actually Parallels Concepts from OSS


Consider 4 “freedoms” of open source:

1)Ability to access & executePlatform Provider

Side 1 Side 2

Platform Sponsor

Side 1

56




1)Ability to access & execute2)Ability to study how the

program works and change it.

Platform Provider

Side 1 Side 2

Platform Sponsor

Side 1 Side 2

57






3)Ability to redistribute copies.

Platform Provider

Side 1 Side 2

Platform Sponsor

Side 1 Side 2

Platform Provider

58






3)Ability to redistribute copies.4)Ability to distribute mods.

Platform Provider

Side 1 Side 2

Platform Sponsor

Side 1 Side 2

Platform Provider

Platform Sponsor

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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

60

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

61

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

62

Danger!

Users Dvprs

Sponsor

Watch for new control points closer to

customer.

Providers

See: Eisenmann, Parker, Van Alstyne (2006). “Opening Platforms: How, When & Why” Ch 6 in Platforms, Markets and Innovation (ed Gawer).

63

Danger!

Users Dvprs

Sponsor

Watch for new control points closer to

customer.

Providers

See: Eisenmann, Parker, Van Alstyne (2006). “Opening Platforms: How, When & Why” Ch 6 in Platforms, Markets and Innovation (ed Gawer).

When should you close (absorb) parts of a platform ecosystem?

Windows: Multithreading, Disk Compression, Internet Browsing,

Streaming Media, Instant Messaging, …

Openness & Time: Having opened its platform, does Microsoft (or Cisco or Google or Apple) kill its ecosystem by bundling developer value into

Windows?

iPhone: Flashlight, Voice Memo, shake-to-shuffle, iBooks, Voice

Control, …© 2011 Parker & Van Alstyne


Should Apple have opened the iPod?

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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


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.

We have explored the platform strategies of many firms

How will you build IBM’s platform strategy?

Background• G. Parker, M. Van Alstyne (2000). “Information Complements, Substitutes, and Strategic Product

Design.” SSRN.com

• A. Gawer, M. Cusumano (2002). Platform leadership: How Intel, Microsoft, and Cisco drive industry innovation. Harvard Business School Press.

• A. Gawer, M. Cusumano (2002). “The elements of platform leadership,” MIT Sloan Management Review

• G. Parker, M. Van Alstyne (2005). “Two-Sided Network Effects: A Theory of Information Product Design.” Management Science.

• T. Eisenmann, G. Parker, M. Van Alstyne (2006). “Strategy for Two-Sided Markets,” Harvard Business Review.

• A. Gawer and M. Cusumano (2008). “How Companies become Platform Leaders.” MIT Sloan Management Review

• A. Gawer, (2009). Platforms, Markets, and Innovation. Elgar.

• G. Parker, M. Van Alstyne (2009). “Opening Platforms: How, When & Why Ch. 6 in Gawer, A. (ed) Platforms, Markets and Innovation.

• M. Cusumano (2010). Staying Power: Six Enduring Principles for Managing Strategy and Innovation. Oxford University Press.

• M. Cusumano (2010). The evolution of platform thinking. Communications of the ACM.

• T. Eisenmann, G. Parker, M. Van Alstyne. (2011) “Platform Envelopment.” Strategic Management Journal.

Thank you

[email protected], [email protected], [email protected]

Twitter: infoEcon




Platform Strategy: Openness, Innovation & Control

Technology

Transcript of Platform Strategy: Openness, Innovation & Control