Developing a Reference Model for Analyzing Mobile Platform Business: From an Ecosystem View

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1 Developing a Reference Model for Analyzing Mobile Platform Business: From an Ecosystem View Full Paper Eunjung Han Bomil Suh Dong-A University Sookmyung Women s University ejhan@dau.ac.kr bmsuh@sookmyung.ac.kr Seung Kyoon Shin University of Rhode Island Shin@uri.edu Abstract A mobile platform is a value network system playing a role as an intermediary that mediates two- or multi-sided stakeholders. It is based on complex inter-firm cooperative relationships for value creation. In this research, we analyze mobile platform business models. Using e 3 -value, an ontological modeling approach, this study proposes a reference model to examine the value architecture of mobile platform business. We adopted the e 3 -value approach to identify the value activities and exchanges in a mobile value network. The model is further adapted to analyze two leading mobile platform ecosystems; Apple s ios and Google s Android. Drawing upon a comparison between the two competitive real-world business cases, we identified the key factors that make a platform ecosystem competitive and collaborative. Our framework sheds light on the aspects of co-creation and co-evolution of a mobile platform business. Keywords Mobile platform, Reference model, Ecosystem, Ontology, Case study Introduction The concept of platform has been developed in product development, software engineering, and economics (Tiwana et al. 2010). In the information and communication technology (ICT) industry, a platform is viewed as a key structuring element (Jacobides et al. 2006). A mobile platform is conceptualized as a value-creating ecosystem in which diverse stakeholders are interrelated to co-create value. Cusumano et al. (2002) argued that the growth of a platform depends on if all participating stakeholders continue to make innovations. Mobile platform providers focus on co-creating benefits to various stakeholders, including content providers, network operators, and device manufactures, rather than on maximizing the profit of a single one (Cortade 2006). The notion of platform business model is to explain the dynamics of a business platform. In this respect, a platform business model should describe how the stakeholders create and capture values by offering a product or service. Using e 3 -value, an ontological modeling approach, this study proposes a reference model describing the structure of the mobile platform business. The model is further adapted for two competitive real-world business cases (ios and Android) to analyze platform ecosystems. We choose the cases because they are two leading global mobile platforms which have most of market share. Drawing upon a comparison between the two leading mobile platforms, we identified the key factors that make a platform ecosystem competitive and collaborative. An exploratory approach was adopted to analyze a platform business model. Our framework sheds light on the aspects of co-creation and coevolution of a mobile platform business. Twenty-second Americas Conference on Information Systems, San Diego,

2 Theoretical Background Platform Business An ICT platform may include a hardware configuration, operating systems, and any other fundamental entities, which a number of associated components or services run on (Ballon et al. 2008). Gawer et al. (2007) pointed out that platform is a technological system in which components are functionally interdependent. The notion of platform is not only a technical construct, but an organizational one. Studies in economics have been focusing on platforms ability to mediate and coordinate between two or more groups of stakeholders (Cortade 2006; Evans et al. 2005). A platform is a two- or multi-sided market; the value obtained by one stakeholder group escalates as the number of the other group increases (Rochet et al. 2003; Evans et al. 2005). According to Cortade (2006), a platform constitutes a set of institutional arrangements necessary to serve transactions between the stakeholder groups. In this study, we conceptualize a platform as an overarching system that consists of the core and complementary components (Tiwana et al. 2010). They are interdependent, acting as an intermediary that mediates two- or multi-sided stakeholder groups (Cortade 2006; Evans et al. 2005; Rochet et al. 2003). Thus, a platform business should center on the stakeholder groups with balancing interests between these groups, rather than on the profit maximization of a single one (Cortade, 2006). Business Modeling Methodology The mobile platform business is a collaborative network business. The value of a mobile platform is created and exchanged within the network around the platform. The success of mobile platform depends on its capabilities to expand the network by attracting more participants (Cortade 2006). Mobile platform business, therefore, should be understood in terms of the capacity of recruiting valued stakeholders and of co-creating benefits with them. We adopt the e 3 -value, an ontology-based method, to investigate how a firm structuralizes partner network to offer greater value to stakeholders. Gordijn et al. (2003) proposed the e 3 -value approach to examine a business model within an associated network. The e 3 -value presents the value exchanges among stakeholders by the modeling diagram with symbols. Camponovo et al. (2003) argued that the business model ontology helps stakeholders effectively communicate and share an understanding of business processes in a dynamic business environment. Business modeling using the e 3 -value is suitable to depict value exchange in a mobile platform network. Figure 1. Components of the e 3 -Value (Pijpers et al. 2012) Figure 1 shows the modeling constructs adopted from the e 3 -value. An actor is regarded as an economically independent entity. A value object including services, goods, money, or information is an economic value exchanged via value interfaces. A value interface involves value ports (small triangles in a Twenty-second Americas Conference on Information Systems, San Diego,

3 value interface) offering or requesting value objects. Trading value objects is represented by two value transfers between ports. Value transfers takes place between actors. We used e 3 -editor to create e 3 -value diagram. Development of Reference Model Value Network of Mobile Industry The ICT systems have often been viewed as a hierarchically structured value chain. A mobile platform business is, however, based on more complex inter-firm cooperative relationships for value creation (Fransman 2007). The traditional approach of a linear value chain structure is inadequate for mobile platform business (Basole et al. 2011). It is because a mobile platform business operates on a value network in which value objects are co-created by multiple organizations. We classify actors of a mobile platform into four groups; device manufacturers, network operators, content/service providers, and platform providers (Yoo et al. 2010). These actor groups constitute a value network of a mobile platform. They play a key role in designing and building the hardware, software, and network infrastructures required for the platform. The reference model in Figure 2 depicts the fundamental architecture of value exchange in a mobile platform. It shows symbiotic relationships among actor groups. A red-line arrow represents the flow of material, while a blue-line arrow indicates the flow of financial resources. The material and financial flows make a pair, which means that commercial values are generated by offering technological goods/services. Figure 2. Reference Model of Mobile Platform Business Actors can make economic values by using technology resources provided by the platform provider. The platform plays the role of a mediator in the process of value exchange and of converting technology resources to the goods or services. For example, platform providers allow third-party content/service providers to access device resources in mobile devices by open application programming interfaces (APIs) Twenty-second Americas Conference on Information Systems, San Diego,

4 and software development kits (SDKs). The services provided by third-parties flow back into the platform. The app services are distributed through the platform providers marketplace to end-users. The success of platform business may depend on the indirect network effect. The platform provider can amplify the indirect network effect of the two-sided market. The size of one customer group has an impact on the size of the other customer group. For example, users is likely to join the marketplace when the number of content providers grows because users are attracted by an increase of available apps provided. Similarly, the more users join the market, the more content providers participate. Role-driven Approach for Platform Business Model Analysis Platform providers develop technological standards needed to build the infrastructure of a mobile platform. They also regulate the way of using platform resources, and promote compatible and innovative third-party services. Lyytinen et al. (2002) pointed out that a technological system is built on standard mechanisms that coordinate actors. From this perspective, we identify three key roles of a platform provider managing a two-sided market; device manufacturing, provision of enabling technologies, and application distribution/marketing. Additional roles include content/service provision or aggregation, and providing payment methods. The platform provider makes an effort to play multilateral roles to govern the mobile platform ecosystem. The other actors also compete for more roles within the ecosystem. Type of roles each actor plays determines the value architecture of the platform. Case Studies on Mobile Platform Business Model Apple s ios Platform Figure 3. Apple s ios Platform Business Twenty-second Americas Conference on Information Systems, San Diego,

5 In this section, we analyze ios platform business model from an actor s role based view. The value network in Figure 3 shows that values flow through ios platform. Apple successfully fostered the twosided market of content/service providers and users. The value architecture presents how Apple infuses the three roles (device manufacturing, provision of enabling technologies, and application distribution/marketing) into its business model so as to develop a strong platform leadership. A device is the station where users search for and consume app services and connect to the Internet. Enabling technologies like OS allow apps to efficiently run using device resources. An app marketplace is the artifact for distribution and marketing of apps. It aims to increase the transaction volume so as to successfully induce the indirect network effect. Service provision and aggregation, providing payment methods, and advertising network (i.e. Apple iad and Google AdMob) are important roles that make Apple s platform ecosystem distinct. The proprietary services integrated in the Apple s devices are for registered users in ios platform. The services differentiate Apple s devices from competitors. Providing payment methods is another important role that warrants the platform provider to govern the app marketplace and to generate extra-revenue. In addition, Apple provides iad service as an advertising network. It makes content/service provider insert ad banners into its apps to capture revenue. Third-party content/service providers must register their apps in Apple s app marketplace, App Store, in order to deliver them to ios users. The tightly-coupled value network of a device, ios, and App Store makes a successful indirect network effect between content/service providers and users. A portal or service aggregator offers a content delivery platform with their own services. If the aggregator plays the role of app distribution and marketing, they can create an opportunity to expand their own business model. The value stream between aggregators and users implies that aggregator platforms are interfered by ios platform. Apple prohibits in-app purchases that don t comply with its payment policy. In ios platform, it is not an easy task for actors to implement a new business model because the network effect of service aggregator platform is interfered by Apple s strict governance policy. Google s Android Platform Google provides Android as a software-based platform on which various application services are provided. Even Google allows third-party device manufacturers to adapt Android to create their own application market. This study compares Google s proprietary Android platform with Apple s ios platform. The mobile ecosystem of Android appears to be less integrated than that of ios. Google s Android, as a software-based platform, focuses on a mediator role that bridges among actors in the mobile value network. The network creates values as a collaborative alliance of diverse partners. Google adheres to the open source policy to partner association. Google has strategically acquired a large number of users through the partner alliance, supplementing network and device resources. Google s open source strategy offers the actors a greater degree of autonomy, by which they can exploit a new business model. Figure 4 shows how the roles of each actor are executed in the associated market segment. Google focuses on two key roles as a platform provider; provision of enabling technologies, and application marketing/distribution. Actors in the value network can also play the role of the marketing/distribution role. Network operators, device manufacturers, and content/service aggregators can play a platform role by distributing and marketing apps. Such service-oriented platform is vertically built on Android. Google warrants freedom of executing innovative business models rather than exclusively governing its whole value network. Google designed the value architecture focusing on advertisement revenue, and leveraging the influence of Google services. For example, Google has numerous proprietary application services including Gmail, Youtube, and Google Maps. These services are pre-installed in the mobile devices under commercial license agreement. Google focuses on pervasive distribution of a wide range of services. In Android ecosystem, there are numerous app marketplaces operated by various actors including network operators, device manufacturers, portals, all of which play a role of content/service aggregator. In Figure 4, the actors may play a role of the platform by mediating the two-sided market. When platform roles are diversified by actors, an actor may have an opportunity to develop its own innovative business model. Twenty-second Americas Conference on Information Systems, San Diego,

6 Figure 4. Google s Android Platform Business ios follows a close governance model, whereas Android advocates an open governance model. Both platforms have an app marketplace as a means to manage their networks. It is worth noting that Google allows partners to integrate the function of app marketplace with their own service offering, which may attract various actors to participate in Android ecosystem. Dynamic Evolution of Platform Business Mobile platform business is a complex value network in which various stakeholders play multiple roles. From an analysis of the two outstanding business models, we learn that an OS-based software platform (i.e. ios and Android) is the core of a mobile business value network. Recently, an emerging form of platform like Facebook has begun to lead the platform economy. This is a service-oriented platform built on an OS-based software platform. In this section, we explain the evolution of mobile platform business. Platformization The two platform providers, Apple and Google, have dominated the platform role by offering mobile OS s and software development environment. The OS-based platforms have monopolized the mobile value network market. Recently, a group of content/service providers have begun to take the role of a platform. They provide a variety of third-party application services, play the role of distribution channel of application services, and supply APIs that integrate a third-party application into their own services. This phenomenon is explained by platformization (Hoelck et al. 2015). Actors in platform compete to take the leadership position in a new platform, developing a powerful business model. Platformization results from the evolution of content/service applications into the service platforms. For example, Facebook serves as a distribution channel of the content and applications as well as a service application itself. Facebook plays a role of a platform that mediates between applications and end-users. These service-oriented platforms are built on the technology resources provided by software platforms since mobile applications run on mobile OS. We conceptualize a vertically integrated platform Twenty-second Americas Conference on Information Systems, San Diego,

7 as a platform-over-platform business model. Platform-over-platform business model results from a dynamic evolution of platform business environment. Platform Ecosystem A platform business model should have a well-designed structure that provides stakeholders with the proper profitability and encourages them to collaborate for evolution of the platform (Chesbrough et al. 2002). We developed a conceptual framework for a mobile platform business from an ecosystem perspective. A business ecosystem is a network of actors, in which participants depend on each other for their success and sustainability (den Hartigh et al. 2006). Iansiti et al. (2004) argued that actors in a business ecosystem share a worldview and act collectively with others in the system. A business model of a mobile platform may be considered as a business ecosystem, in which organizations are engaged in collaboration and competition to co-evolve (Zahra et al. 2011). Figure 5 presents a framework of platform business ecosystem centered on the proposed reference model (Figure 2). The reference model is anchored on the structural value exchange prototype in platform business. The value architecture of a business model can be constructed using the model. The framework addresses both business and technology environments in which a platform business is executed. Relying on the theory of business-it alignment (Camponovo et al. 2003; Derzsi et al. 2006; Pijpers et al. 2009), we argue that the value architecture should be aligned with the strategy and the IT/IS architectures. The e 3 -value model is adapted into the strategy and the IT/IS architecture. The proposed framework is sufficiently useful in that it helps diverse stakeholders understand the business environment related to a mobile platform and helps them align business strategy to platform design. Figure 5. Platform Business Ecosystem Framework Business Environment Analysis for Firms Competitive Advantage In this section, we investigate the business environment in terms of third-party actors. First, we conceptualized the business strategic environment as two strategic positions; competitiveness and collaborativeness. Then, we assessed the strategic position of third-party app providers in ios and Android ecosystem by five-point scales (Pijpers et al. 2012). A survey was conducted with 15 third-party app vendors by , telephone, and face-to-face interview. The respondents are technical staffs or business managers who had more than 3 ~ 5 year industry experience. In order to compare the two competitive mobile platforms, we selected field subjects who had developed applications in both platforms. The size of companies for which the subjects work as follows; 7 with less than 30 employees, 2 with 30 to 50 employees, and 6 with more than 100 employees. Competitive business environment was measured in terms of three business forces including suppliers, buyers, and competitors (Pijpers et al. 2012). The bargaining power of each business force is compared in Table 1. In ios ecosystem, the suppliers (platform providers) have more bargaining power than other two forces, while the buyers (end-users) appear to have more bargaining power in Android ecosystem. Note that the bargaining power of buyers of two platforms appears to be statistically significantly different. The distinction between ios and Android ecosystem is explained as follows; ios ecosystem is highly regulated by the supplier, Apple. Android, on the other hand, follows open governance policy. Openness relates an ease of restriction on the use, development, and commercialization of a technology, while a closed system is wholly owned, proprietary, vertically integrated, and controlled by a single party (Boudreau 2010). Google s open governance policy may increase the numbers of apps, which raises the indirect network effect. The growth of buyer group makes themselves have more bargaining power. Twenty-second Americas Conference on Information Systems, San Diego,

8 Platform Business Force Suppliers Buyers Competitors ios Android t-test ** 0.67 ** : p < 0.05 Table 1. Bargaining Power of Three Business Forces Collaboration is enabled upon an interdependent relationship. We focus on the four collaboration typologies according to the collective strategy framework (Astley et al. 1983). A collaborative relationship can be classified by interdependence form and interaction type. A horizontal interdependence means a relationship with a rival company, while a vertical one is a partnership with a complement. As to interaction type, a direct association refers to a collaborative effort in marketing, licensing agreement, or resource acquisition, while an indirect association is formed by sharing common resources. Platform Collaboration Typology Horizontal Interdependence Direct Association Indirect Association Vertical Interdependence Direct Association Indirect Association ios Android t-test ** Table 2. Collaborativeness of Four Types ** : p < 0.05 The collaborativeness was assessed by the measurement of Dollinger et al. (1992). Table 2 shows the degree of collaborativeness in ios and Android ecosystem, respectively. The collaborativeness of indirect association turns out to be greater than that of direct association for both the horizontal and vertical interdependence, which means that apps are easily co-operable when multiple apps share common resources like APIs. It is worth noting that the collaborativeness of indirect association with competitors is statistically significantly stronger in Android ecosystem than in ios ecosystem. Android s open governance policy facilitates indirect collaboration with competitors. For example, Android provides APIs for sharing data between apps, whereas Apple doesn t allow inter-app sharing. The distinction between the strategic environments provided by two mobile ecosystems results from differences in the platform governance policy. Conclusion In this research, we analyzed mobile platform business models. A reference model was developed to examine the value architecture of mobile platform business. We adopted the e 3 -value approach to identify the value activities and exchanges in a mobile value network. We investigated two leading mobile platforms; Apple s ios and Google s Android. The academic contributions of this study are in two folds. First, we presented a structured method to understand mobile platform business from a value network perspective rather than a value chain perspective. Stakeholders in a platform co-create the network economy through value exchanges being Twenty-second Americas Conference on Information Systems, San Diego,

9 mediated by the platform. We identified the key roles of a platform provider in developing and managing the value network. The results may help companies understand the dynamic structure of mobile business. This study offers a set of design guideline for a successful business model. Second, we proposed a conceptual framework of mobile platform value network from an ecosystem perspective. Actors in a platform co-evolve and, at the same time, compete for strategically positioning themselves in the platform network, while aligning its business strategy to the business environment. Our empirical result reveals a distinction between the two leading mobile platforms, which has an impact on actor s selection on mobile business platform. A company that plans to launch a new business model in a mobile environment needs to identify which mobile platform is more beneficial for its business model than the others. A mobile business model should be transformed in the agile and flexible way to succeed in the competitive mobile market. The method proposed in this study may propose a structured way to find which mobile platform is better than the others for more agile and flexible testing and development of a business model. This study has limitations. It is desirable to empirically show the dynamics of technology evolution in the mobile industry. As for the platform business ecosystem framework, more elaboration is required to define the process of aligning the value architecture to the strategy architecture and the IT/IS architecture. Since this study analyzed only the original Google s Android platform, it does not encompass all families of Android OS such as the MiUI OS of Xiaomi. Lastly, the sample size of our survey is small, and thus the analyses of the collected data need to be revisited with the sufficient size of sample. In this regards, further researches is needed for developing a refined business modeling methodology. REFERENCES Astley, W. G., and Fombrun, C. J "Collective strategy: Social ecology of organizational environments," Academy of management review (8), pp Ballon, P., Walravens, N., Spedalieri, A., and Venezia, C "The reconfiguration of mobile service provision: towards platform business models," ITS European Regional Conference. Rome, Italy. Basole, R. C., and Karla, J "On the evolution of mobile platform ecosystem structure and strategy," Business & Information Systems Engineering (3:5), pp Boudreau, K "Open platform strategies and innovation: Granting access vs. devolving control," Management Science (56:10), pp Camponovo, G., and Pigneur, Y "Analyzing the m-business landscape," Annals of telecommunications (58:1), pp Chesbrough, H., and Rosenbloom, R. S "The role of the business model in capturing value from innovation: evidence from Xerox Corporation's technology spin off companies," Industrial and corporate change (11:3), pp Cortade, T "A strategic guide on two-sided markets applied to the ISP market," Communications & Strategies (61), 1st Quarter Cusumano, M. A., and Gawer, A "The elements of platform leadership," MIT Sloan Management Review (43:3), pp den Hartigh, E., Tol, M., and Visscher, W "The health measurement of a business ecosystem," Proceedings of the European Network on Chaos and Complexity Research and Management Practice Meeting. Derzsi, Z., and Gordijn, J "A framework for business/it alignment in networked value constellations," Proceedings of the workshops of the 18th International Conference on Advanced Information Systems Engineering (CAiSE 2006), Citeseer, pp Dollinger, M. J., and Golden, P. A "Interorganizational and collective strategies in small firms: Environmental effects and performance," Journal of management (18:4), pp Evans, D. S., Hagiu, A., and Schmalensee, R "A survey of the economic role of software platforms in computer-based industries," CESifo Economic Studies (51:2-3), pp Fransman, M "Innovation in the new ICT ecosystem," Communications & Strategies (68), p 89. Gawer, A., and Henderson, R "Platform Owner Entry and Innovation in Complementary Markets: Evidence from Intel," Journal of Economics & Management Strategy (16:1), pp Gordijn, J., and Akkermans, J. M "Value-based requirements engineering: Exploring innovative e- commerce ideas," Requirements engineering (8:2), pp Twenty-second Americas Conference on Information Systems, San Diego,

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