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

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  • 1. Business models in two-sided markets:an assessment of strategies for appplatformsICMB DelftIana Kouris, Robin KleerRWTH Aachen University, Germany
  • 2. Agenda▪ Introduction▪ Background and literature review▪ Strategies for app platforms▪ Discussion and conclusion 1
  • 3. 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
  • 4. Based on the two-sided market theory and platform management literature as wellas assessment of key stakeholders we analyze strategies in the app platformindustry Key stakeholder Theory ▪ App platforms ▪ Platform management, e.g., Gawer and Strategies for Cusumano (2008), ▪ Developer app platforms Eisenmann (2007) ▪ Two-sided markets theory, e.g., Rochet and ▪ User Tirole (2003, 2006), Armstrong (2006) Focus on app platforms but main insights are applicable to other (internet-based) platforms. 3
  • 5. Agenda▪ Introduction▪ Background and literature review▪ Strategies for app platforms▪ Discussion and conclusion 4
  • 6. 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
  • 7. Two-sided market theory Platform Sellers (S) Buyers (B) “ “On two-sided markets, platforms intermediate transactions between two groups of agents valuing each others 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 ” 6
  • 8. App platforms can be analyzed using two-sided market theory ▪ Key players are AppStore, Android Market, Blackberry, Windows Mobile App Platform ▪ Total Revenue USD 4 billion in 2011 (and growing) (=Platform) ▪ 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 Developers through advertisement) (=Seller) ▪ Attract customers via versioning (lite vs. prime), free trials, personification ▪ Access to platform via mobile device ▪ Mobile device and apps are complementary goods Users ▪ Provide rating of apps (=Buyer) ▪ Different customer segments (Apple, Blackberry vs. Android) 7
  • 9. Two-sided markets literature provides valuable theoretical insights Seller market side Buyer market side Fees Fees PSNew PBOld PSOld PBNew Number of Number of DBOld DBNew sellers DSOld DSNew sellersSOURCE : Parker, J.J. und Van Alstyne, M.W. (2005) Two-Sided Network Effects, Management Science 51(10), pp. 1494–1504 8
  • 10. 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
  • 11. Agenda▪ Introduction▪ Background and literature review▪ Strategies for app platforms▪ Discussion and conclusion 10
  • 12. We consider key strategic issues along 3 phases of a life cycle Key strategic issues and decisions Design phase Launch phase Competition phase 11
  • 13. During the design phase platform should check, if it can apply “coring”, then makedecisions regarding fees size and allocation and quality of participants Key strategic issues and decisions Design phase ▪ 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) Launch phase Competition phase 12
  • 14. During the launch phase platform should concentrate on getting both sides onboard, followed by decisions regarding openness and “envelopment” Key strategic issues and decisions Design phase ▪ 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) Launch 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) Competition phase 13
  • 15. During the competition phase it is key to determine if the market is prone to“winner-takes-all” dynamics Key strategic issues and decisions Design phase ▪ 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) Launch 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) Competition ▪ Main factors influencing „winner-takes-all-dynamics” (Eisenmann phase 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
  • 16. Observations and suggestions for app platforms business models Design phase ▪ 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) Launch 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) Competition ▪ App platform industry shows a high tendency towards convergence phase 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
  • 17. Agenda▪ Introduction▪ Background and literature review▪ Strategies for app platforms▪ Discussion and conclusion 16
  • 18. 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) 17

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