Platforms: How Change in Industry is Driving Change in Strategy

1. Barcelona, Spain • October 29-31, 2015 © 2015 Parker & Van AlstyneTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com Marshall Van Alstyne Boston University & MIT marshall@mit.edu InfoEcon@twitter.com Platform Shift: How New Biz Models Are Changing the Shape of Industry MIT Leading Disruption Nov 18, 2015

2. 2© 2015 Parker & Van AlstyneTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com The transition to Internet era firms resembles the transition to industrial era firms … but for different reasons @InfoEcon

5. 5© 2015 Parker & Van AlstyneTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com Platform Firms Becoming More Important in Economy 3 of top 5 firms in 2015 by market cap. FIRM MARKET CAP Apple 627 Exxon Mobile 385 Microsoft 377 Berkshire Hathaway 357 Google 344 @InfoEcon FIRM MARKET CAP Apple 635 Google 500 Microsoft 424 Exxon Mobile 333 Berkshire Hathaway 328

6. 6© 2015 Parker & Van AlstyneTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com Platform Firms Becoming More Important in Economy % of top 20 firms by market cap since 2001 Percentage of Platform Firms weighted by MKT CAP (2001-2014) 35% 30% 25% 20% 15% 10% 5% 0% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2014 MKTCAPWeightedPlatform Firms @InfoEcon

10. 10 1. Enumerate embeddable features: salty, citrus, sour, toasted, … 2. Get consumer preferences 3. Match to best recipes 4. Mix new combinations, help users create & upload, allow ratings, build a community How would you create a platform around spice? © 2015 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com

11. 11 Create a whole geometry of flavor combinations

12. 12© 2015 Parker & Van AlstyneTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com The Product Business Model is Broken © 2015 Parker & Van AlstyneTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com @InfoEcon

13. 13© 2015 Parker & Van AlstyneTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com The Product Business Model is Broken In 2009, BlackBerry had nearly 50% market share in U.S. mobile, according to IDC. In 2013: 2.1% 2008 2009 2010 2011 2012 2013 50% 40% 30% 20% 10% 0% @InfoEcon

14. 14© 2015 Parker & Van AlstyneTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com 1980-2000 Microsoft Platform Beats Apple Product Apple launched the PC revolution but Microsoft licensed widely, built a huge developer ecosystem, 6X larger. @InfoEcon

15. 15© 2015 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com How are these Related? Each Side Attracts More of the Other eBay Buyers Uber Riders Xbox Gamers Amex CardHolders Aga Khan Patients YouTube Viewers AirBnb Renters Tesla Car Drivers Mechanical Turk Jobs LinkedIn Job Seekers Upwork Freelancers Android Users eBay Sellers Uber Drivers Xbox Developers Amex Merchants Aga Khan Doctors YouTube Videographers AirBnb Rooms Tesla Charge Stations Mechanical Turk Laborers LinkedIn Job Listings Upwork Project Listings Android Developers

16. 16© 2015 Parker & Van AlstyneTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com Network Effects: Users create value for Users Source: Albert Cañigueral “Platforms are Eating the World” slideshare.net @InfoEcon

17. The giants of the Internet era resemble those of the Industrial era but for the opposite reason. © 2015 Parker & Van AlstyneTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com @InfoEcon

18. 18© 2015 Parker & Van AlstyneTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com Giants of Supply Side Economies of scale Electric Dynamo 1893 Ford Model T 1908 Standard Oil 1909 Acklam Ironworks 1924 Vanderbilt Colossus of (Rail) Roads @InfoEcon

20. 20© 2015 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com $1B+ Platforms by Region Source: P. Evans, CGE; CB Insights, Capital IQ, CrunchBase, 2015 Private Public North America Asia Europe Africa & L. AmericaNorth America Europe Africa & Latin America Asia North America has more platform firms than anywhere else in the world. China, with a large homogeneous market, is growing fast. Europe, with a more fragmented market, has less than ¼ the value of North America and is not far ahead of developing regions

21. 21© 2015 Parker & Van AlstyneTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com In any market with network effects, the focus of attention must shift from inside to outside the firm. Reason: You can’t scale network effects inside as easily as outside. @InfoEcon

23. 23© 2015 Parker & Van AlstyneTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com Four Decades of Consumer Marketing 1980’s Segmentation Source: Rob Cain, CIO Coca Cola Company Single Message 1990’s Individual Targeting 2000’s Virality / Social Influence 2010’s

24. 24© 2015 Parker & Van AlstyneTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com Four Decades of Consumer Marketing 1980’s Segmentation Individual Targeting Virality / Social Influence Single Message 1990’s 2000’s 2010’s PUSH / OUTBOUND PULL / INBOUND

25. Emphasis shifts from employees to contractors, from internal experts to external crowds, and from subordinate dictation to community persuasion What Changes :: Human Resources © 2015 Parker & Van AlstyneTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com @InfoEcon

27. These sources of value are outside the firm eBay Buyers Uber Riders Xbox Gamers Amex CardHolders SAP Enterprise Clients YouTube Viewers AirBnb Renters Tesla Car Drivers Mechanical Turk Jobs LinkedIn Job Seekers Upwork Freelancers Android Users eBay Sellers Uber Drivers Xbox Developers Amex Merchants SAP Developer Network YouTube Videographers AirBnb Rooms Tesla Charge Stations Mechanical Turk Laborers LinkedIn Job Listings Upwork Project Listings Android Developers @InfoEcon

30. © 2015 Parker & Van AlstyneTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com • Estimate global taxi market • Estimate market share • Est. risk adjusted cash flow • Consider proprietary methods, barriers to competition • Value: $5.9 Billion Aswath Damodaran: NYU Finance professor, Corporate Valuation author, Herb Simon Prize. @InfoEcon

31. Bill Gurley: Venture Capitalist, OpenTable, Zillow, Uber © 2015 Parker & Van AlstyneTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com • All true but overlooking network effects. • Prices decline expanding to rental car market and car replacement market and delivery market. • Oh, BTW, already 3x size in 2009 when Uber started. • Value: $17 Billion Source: David Sacks, COO PayPal, CEO Yammer @InfoEcon

32. Value creation shifts from internal to external servicing What Changes :: Operations & Logistics © 2015 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com @InfoEcon

36. 37© 2015 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com Business Models Can Overlap Platforms Scale More than Pipes Dell Coca Cola Apple Samsung Airbnb Uber

37. Founded in 2008, Airbnb operates at global scale: 1M+ listings, 34,000 cities, 180 countries Identify spare capacity, scale across boundaries Paris 5,692 listings40,000 listings 8,105 listings Berlin Sydney Source: http://tomslee.net/airbnb-data, 2015Courtesy Peter Evans © 2015

38. API Economy Visualized: Amazon vs Walmart Walmart Amazon SNS Alexa Web Inform Amazon Marketplac e Amazon SimpleDB Amazon Product Advertising Amazon CloudWatch Amazon Flexible Amazon Redshift Amazon SC2 Amazon S3 Amazon Mechanical Turk Amazon RDSAmazon DynamoDB Amazon Queue Service Social media / web Job search / work E-commerce Tools / cloud / big data Payments API Clusters Messaging services Source: Rahul Basole and Peter Evans, with data from ProgrammableWeb, Center for Global Enterprise, 2015 Walmart Amazon Companies Enterprise / storage

39. 40© 2015 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com Walmart vs Amazon growth over 10 years: 12% vs 1516% Logistics & supply chain squeezing have limits. External value add is much less limited.

40. “In 2015, Uber, the world’s largest taxi company owns no vehicles, Facebook the world’s most popular media owner creates no content, Alibaba the most valuable retailer has no inventory, and Airbnb the world’s largest hotelier owns no real estate.” Tom Goodwin, Sr. VP of Strategy Havas Media © 2015 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com @InfoEcon

42. “A platform is a system that can be… adapted to countless needs and niches that the platform’s original developers could not possibly have contemplated…” Mark Andreessen: Venture Capitalist, Netscape Founder, Board HP, eBay© 2015 Parker & Van AlstyneTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com Source: “The 3 kinds of Platform you Meet on the Internet” – Sept 16, 2007. @InfoEcon

43. 44© 2015 Parker & Van AlstyneTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com It’s Working when Users do Something You Didn’t Expect Hay Carrier Mobile ChurchFlour Mill Ford Model T @InfoEcon

44. 45© 2015 Parker & Van AlstyneTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com − Open to .com” Open to developers − The Rise & Inglorious Fall of MySpace – Business Week 2011 Does Openness Work? @InfoEcon

45. 46© 2015 Parker & Van AlstyneTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com  Consider product innovation alone  Adding 3rd party resources, innovation occurs at a higher rate  Even if a platform starts behind, its value overtakes the product leader  Shed costs, keep 30% gains! Why Platforms Beat Products Time ValueAdded

46. Goal shifts from control, entry barriers, and differentiation to more valuable market exchanges. What Changes :: Strategy © 2015 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com @InfoEcon

47. 1. Goal is a protected market niche, emphasizing industry barriers 2. Categories are sharp 3. Weapon is cost leadership or product differentiation 4. Inimitable resources you own provide sustained advantage 5. Core competence: focus what you do best Porter’s Five Forces & Resource Based View © 2015 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com @InfoEcon

48. Platform Strategy Differs © 2015 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com 1. Goal is interactions that yield NW effects - partner to partner value. NW effects provide sustainability @InfoEcon

49. Platform Strategy Differs © 2015 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com 1. Goal is interactions that yield NW effects - partner to partner value. NW effects provide sustainability 2. Boundaries can be altered @InfoEcon

50. Platform Strategy Differs © 2015 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com 1. Goal is interactions that yield NW effects - partner to partner value. NW effects provide sustainability 2. Boundaries can be altered 3. Competition is multi-layered, more like 3D chess. @InfoEcon

51. Platform Strategy Differs © 2015 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com Owned / inimitable resources Profits increase when others add to platform’s Long Tail You don’t need to own this 1. Goal is interactions that yield NW effects - partner to partner value. NW effects provide sustainability 2. Boundaries can be altered 3. Competition is multi-layered, more like 3D chess. 4. Don’t need to own inimitable resources. Have them join you!

52. 53© 2015 Parker & Van AlstyneTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com  Finance Shareholder Value  Stakeholder Value Incorporate network effects  Human Resources Internal Employees  External communities  R&D Experts & Specialized departments  Crowdsourcing & Open Innovation  Strategy Entry Barriers & Inimitable Resources  Ecosystem husbandry & Long Tail  Marketing Push  Pull, Outbound  Inbound  IT Back Office (ERP)  Front Office (CRM)  Out-of-Office (Social & Big Data)  Operations & Logistics Uber: biggest taxi company, no taxis, Airbnb (biggest accommodations but no real estate), Facebook (biggest media firm but creates no content), Alibaba (biggest merchant but has no inventory) Network Effects & Inverting the Firm Changes… @InfoEcon

53. © 2014 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com Services Protected by Credentialing, Complexity, Regulation & Hard Assets Consumer Goods Home Goods Automotive Conslt: Eden MacC Labor : oDesk $$$: eToro, Kickstr News : Twitter Insurance : ? Law : LegalZoom Education : edX Art & Craft : Etsy Apparel:Lee & Fung Shirts : Threadless Shoes : Nike Fuel Watches : Apple Thermostat : Nest Lighting : Philips Appliance : Haier Rides : Uber Cars : 3d Printed Cars : Mercedes Info & Tech Games : Nintendo Cloud : AWS Search : Google OS : MS Windows Maps : Google APIs PDF : Adobe Movies : Netflix

54. © 2014 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com Food & Agri Protected by Credentialing, Complexity, Regulation & Hard Assets Crop Yield : IBM Spices : McCormick Government Farming : eChoupal City : Singapore Medicine Devices : Biomet MRI : Cohealo Healthcare:Harvard Heavy Industry Tractors : Hitachi Engines : GE Predix Energy & Mining Mining : Gold Corp Utility : EnerNOC

55. © 2015 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com • Incandescent light bulb • Edison patent filed 1878 • Same bulb 137 years later • Energy efficiency < 5% • Retail price $0.40

56. © 2015 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com • Blue Ocean product strategy • Compact fluorescent efficiency 11% • LED luminous efficiency 15% • Multicolor programmable • Retail price $4 - $40

57. 58© 2015 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com IoT Platform Strategy: Data, Sensors, Open Ecosystem • Offer Wii, Bluetooth, or LiFi • Security alert – intruder or toddler wondering onto street • Bundle energy demand, sell demand management to utility • Time for grandma’s medication • Voice Commands: o “I’ve fallen and I can’t get up” o Remind John to take out garbage Can give away $4-40 bulbs and charge for servicesTry selling $4 bulb when competitor gives away $40 bulb free

63. 1. Introduction: Welcome to Platform World 2. Network Effects: The Power of the Platform 3. Architecture: Basic Principles for Designing Successful Platforms 4. Disruption: How Platforms Conquer &Transform Traditi’l Industries 5. Launch: Chicken or Egg? 8 Ways To Launch Successful Platforms 6. Monetization: Capturing the Value Created by Network Effects 7. Openness: Defining What Platform Users/Partners Can &Cannot Do 8. Governance: Policies That Increase Value and Enhance Growth 9. Metrics: How Platform Managers Can Measure What Really Matters 10. Strategy: How Platforms Change Competition 11. Policy: How Platforms Should (and Should Not) Be Regulated 12. Future: Industries Facing Imminent Change Platform Revolution: February 2016 (click to pre-order on Amazon)

65. THANK YOU QUESTIONS & DISCUSSION © 2015 Parker & Van AlstyneTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com marshall@mit.edu Twitter: @InfoEcon Find research HERE. Find blog posts HERE.