Platform Economics and Driving Innovation. CDB Annual Conference May 23, 2012

Transcription

1 Platform Economics and Driving Innovation Geoffrey Parker Tulane University & MIT Marshall Van Alstyne Boston University & MIT CDB Annual Conference May 23, 2012

2 Agenda Understanding platforms Externalities and network effects in ecosystems Winner-Take-All Elements of platform strategy Analytics Pla 2

3 Product platforms Subsystems and interfaces to form structure from which multiple products can be efficiently developed. 3

4 Industry Platform Battles 4 4

5 Interview: Platform Definition A platform is a set of tools provided to other entities who provide services on top of the platform. The platform is not sold but services on top are sold. Customers are not exposed to the tools, but to the service. It s a public solution model and development environment. 5

6 Industry 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. 6 6

7 Agenda Understanding platforms Externalities and network effects in ecosystems Winner-Take-All Effect Elements of platform strategy Analytics Pla 7

8 Traditional Linear Value Chain Stage 1 Stage 2 Stage 3 $ $ $ Value accumulates from stage to stage Minimal Network Effects 8 8

9 Apple ipod pre-platform Apple User Content $ $ (1) Product First Thinking (2) Standard linear value chain (3) User matches MP3 player to library (4) Minimal network effects 9

10 Apple ipod post-platform User $ $ Content Apple (1) Triangular platform supply network (2) Apple owns financial chokepoint (3) Apple matches users to content (4) Stronger network effects 10

11 A two-sided network has four network effects Side 1 Side 2 $ $ Platform 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 11

12 Agenda Understanding platforms Externalities and network effects in ecosystems Winner-Take-All Effect Elements of platform strategy Analytics Pla 12

13 Homing and Switching Costs Mono-homing 1 SETUP + 1ONGOING Switching 2 SETUPS + 1 TERMINATION + 1 ONGOING Multi-homing 2 SETUPS + 2 ONGOING 13

14 Winner Take All (or Most) if Strong network effects within and across user types Little room to distinguish among platforms Multi-homing rare costly for end users, application developers, advertisers to use more than one platform 14

15 Agenda Understanding platforms Externalities and network effects in ecosystems Winner-Take-All Effect Elements of platform strategy Analytics Pla 15

16 Services to Platforms: Facebook Users Ads Apps Firms Restricted (edu) access drove adoption Enable Ads Enable Apps (APIs) Add Firms with Facebook Connect Platform Core Service: Help users stay connected or reconnect Monetization: Need the other side 16

17 Open Platform to 3rd Parties Avoid Vertical Integration and avoid going it alone. Four ways to aid your ecosystem: Application Programming Interfaces (APIs) System Development Toolkits (SDKs) App Store (like itunes or App Exchange) Recommender Systems Custmr Dvpr Platform Provider Platform Sponsor 17

18 Does Openness Work? While Facebook focused on creating a robust platform that allowed outside developers to build new applications, Myspace did everything itself. Open ``We to developers tried to create every feature in the world and said, Open gift store `O.K., we can do it, why should we let a third Open to.com 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.'' The Rise & Ignominius Fall of MySpace Business Week

19 Benefits of Openness Harness 3rd party innovation. Partners have ideas we have not considered. Successful projects increase the size and value of the market. Share risk. Not every project will succeed; add a cushion for the platform sponsor who cannot afford to conduct all market experiments alone. Creates an additional revenue streams that further enhances the value of the platform. 19

20 Maintain Control A platform needs one controlling party, services supporting an ecosystem, you must help partners monetize, leveraging foundation to facilitate partner-to-partner interaction, build network effects. Need enabling technology and an economic model with shared risk. Not optimizing just your own pocket 20

21 Identifying choke points that matter PC OS, applications, microprocessor Telecom CPE equipment, physical pipe (last mile), billing Enterprise Rent-a-Car Insurance and body shop relationships, neighborhood locations Online retail (Amazon.com) customer base, distribution infrastructure, affiliate relationships 21

22 Functions Serve as Control Points Apple s original ipod did 1 thing Apple s iphone did many things 22 Only the latter needs to be open. So how to make this work

23 Functions Serve as Control Points Apple iphone has , calendar, contacts, browser, movies, etc. These apps are built from functions: Video, multi-touch screen, wifi, camera & scanner, processor,+++ Platform Control Point Examples Market access Support Information access Incentives 23 Apple exerts control through store access, placement, quality rvw Sanctions (Scholten & Scholten, 2011)

24 Mobilizing the Ecosystem Sounds good in theory, but how? 24

25 Quote you need to invest a little bit at the beginning to make the platform bigger and customers want to benefit because they know that the platform is new and want to benefit from early stage offers. On supplier side Have to make attractive for supplier to contribute in the same ratio he benefits from the platform 25

26 Seeding to solve chicken-and-egg Seeding: Pull services or content onto your platform (Marquis users) Adobe help launched PDF getting tax forms online. Government saved printing and postage Consumers got ready access to documents Seed from existing products & services 26 Only the latter needs to be open. So how to make this work

27 Use 2-sided Pricing to Drive Adoption User Platform Dvpr Do not charge content creators/developers for access to the platform. Adobe, Apple, and even SalesForce all made this mistake! Do not price to marginal cost or price to extract the most revenue from a given user group. Instead, price to drive adoption, maximizing revenues across both sides of the platform. 27 Only the latter needs to be open. So how to make this work

28 Adobe: Subsidize Consumers

29 Agenda Understanding platforms Externalities and network effects in ecosystems Winner-Take-All Effect Elements of platform strategy Analytics Pla 29

30 Platform Analytics Side 1 Side 2 Platform 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

31 Platform Analytics Custmr 4 5 Platform Devlpr 1. Help customers benchmark themselves 2. Help developers benchmark themselves 3. Help customers find developers 4. Help developers find customers 5. Help platform identify common features for the next version

32 Analytics Does there exist a solution for feature x? Develop technology to browse components and how they interact. Search by business area, vendor, popularity, age Convert prospects into customers. Help consummate the match Customers don t tell their competitors how great your product is, instead, like Amazon, show customers who bought A that they might want B. Tool to know size of the opportunity. How big is market? 32

33 Platform firms large/growing part of GDP 33

34 Background & Contact Info G. Parker, M. Van Alstyne (2000). Information Complements, Substitutes, and Strategic Product Design. SSRN. 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). Six Challenges in Platform Licensing and Open Innovation. Communications and Strategies. 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. Geoffrey Parker gparker@tulane.edu, gparker@mit.edu Marshall Van Alstyne mva@bu.edu, marshall@mit.edu 34