Platforms Transitions

1. Product to Platform & Open Business Models Geoffrey Parker Marshall Van Alstyne Tulane University & MIT Boston University & MIT gparker@tulane.edu marshall@mit.edu, InfoEcon@twitter.com

5. 5© 2013 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com Platform Firms Becoming More Important in Economy 3 of top 5 firms in 2013 by market cap. FIRM MARKET CAP Apple 474 Exxon Mobile 433 Google 361 Microsoft 332 Berkshire Hathaway 314

6. 6© 2013 Parker, Van Alstyne & ChoudaryTwitter: @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 (2001-2013) 35 % 30 % 25 % 20 % 15 % 10 % 5 % 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 MKTCAPWeightedPlatform Firms

7. 7© 2013 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com The Product Business Model is Broken © 2013 Parker, Van Alstyne & Choudaryter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com

8. 8© 2013 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com The Product Business Model is Broken In 2009, BlackBerry had nearly 50% market share in U.S. operating systems, according to IDC. Now: 2.1% 2008 2009 2010 2011 2012 2013 50% 40% 30% 20% 10% 0%

9. 9© 2013 Parker, Van Alstyne & ChoudaryTwitter: @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.

14. © 2013 Cisco and/or its affiliates. All rights reserved.14 How would you create a platform around spice? © 2013 Parker, Van Alstyne & Choudaryter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com

15. © 2013 Cisco and/or its affiliates. All rights reserved.15 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? © 2013 Parker, Van Alstyne & Choudaryter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com

17. In building a business ecosystem, how do you set strategy? How do old line business models transition to platforms? What can be a platform (Windows, PayPal, Facebook … Bauxite, Coca Cola)? What does an open business model look like? Can you predict unexpected competition? © 2013 Parker & Van Alstyne

18. Platform Ecosystem Rules 18 • Platforms beat products every time. • Remake the supply chain to “consummate the match.” • Open the top or the bottom of your platform to unexpected innovation, but don’t open both. • Look to your overlapping users to see where tough competitors will attack

19. To be a platform System must provide a useful and embeddable function or service and provide 3rd party access. Examples: iTunes: get music onto iPod SAP: execute ERP systems Facebook: connect family, friends & acquaintances Smart Grids: capture AC/DC sources, route power Nike Fuel: motion capture and social benchmarking Pearson: match people to content, deliver content, certify learning Products have features Platforms have communities

20. How do traditional linear business models transition to platforms given network effects?

21. 21 Traditional Supply Chain Supply $ $ Assemble $ (1) Value accumulates from stage to stage (2) Standard linear value chain (3) Logistics optimize stuff (usu. not incentives) (4) No network effects Manufacture Retail

22. 22 Traditional Supply Chain Biz $ $ Biz $ Biz Cust Potential B2B PlatformPotential B2C Platform

23. 23 Potential B2C Platform BizBiz Cust Potential B2C Platform Biz Biz Cust 1. Make your business a platform by facilitating transactions across your systems.

24. 24 Creating a B2C Platform Biz Cust Biz Biz 1. Make your business a platform by facilitating transactions across your systems. 2. Expand the biz partners who can reach your customers. 3. Expand the customers who can reach your suppliers. Biz CustCust

25. 25 This is a really, really different business model due to network effects…

26. How are these related? eBay Sellers Airlines/Hotels Xbox Developers Visa Merchants Doctors YouTube Videographers AirBnb Rooms Electric Car Charge Stations Mechanical Turk Laborers Monster Employers Android Developers eBay Buyers Travelers Xbox Gamers Visa CardHolders Patients YouTube Viewers AirBnb Renters Electric Car Drivers Mechanical Turk Jobs Monster Employees Android Users Each Side Attracts More of the Other

27. 27 Biz CustBizBiz CustCust Platform Price Quantity Price Quantity Market Biz Market Cust q1 q2 p1 p2 Creating a B2C Platform

28. 28 Setting Price on a Network Platform Platform Price Quantity Market One q1 p1

29. 29 Setting Price on a Network Platform Platform Price Quantity Market One q1 p1 Price Quantity Market Two q2 p2

30. 30 Price Price Market One Market Two Quantity Quantity q1 q2 p1 p2 Platform p1 q1 p2 q2 Creating a B2C Platform

31. 31 Price Market Two Quantity q1 p1 p1 q1 Price Market One Quantity q2 p2 p2 q2 Platform Setting Price on a Network Platform

32. 32 If your supply chain has network effects then… $ Biz $ Biz Cust … you can price wrong … manage the supply chain wrong … get internal organization wrong, and … mismeasure LTV of “free customers” whenever you use linear product model practices.

33. Why do platforms beat products?

34. 34 Apple iPod pre-Platform Apple iPod $ $ Retailer Music Producer Listener $ (1) Product First Thinking (2) Standard linear value chain (3) User bought music retail (or P2P) (4) Minimal network effects

35. 35 Apple iPod combined with iTunes Apple iPod $ $ Retailer Music Producer Listener $

36. 36 Apple iPod post-Platform Apple User Content (1) Remove supply chain inefficiency (2) Triangular platform supply network (3) Apple owns financial chokepoint (4) Apple helps users find content (5) Stronger network effects $$

37. How Apple is killing standalone platforms Lumia Usr Dvpr PSP Usr Gam MP3 User Music Video TV Games Dvpr Web HTML eBooks Publi Calls User Zune Usr Mus MicrosoftSonyNokia Apple has vastly stronger network effects. Sony could have done this – has many great standalone products.Google is not making this mistake with Android Message for you: A great standalone product might not be sufficient. 2007 Today 2007 Today

38. How Apple is killing standalone platforms MP3 User Music Video TV Games Dvpr Web HTML eBooks Publi Calls User Message for you: A great standalone product might not be sufficient. Polycom Speakerphone R1P1 U1 R1P1 U1 Cisco Flip Camera R1P1 U1 HP Calculator Photo Usr Upld Flickr Blkbry Usr Dvpr RIM eRdr Usr Upld Sony

39. Why Apple isn’t killing Kindle We asked ourselves: “Is there some way we can bring all of these things together [web service, Prime, Kindle, instant video and the app store] into a remarkable offering customers would love?” Yes, the answer is Amazon Kindle Fire. November 14, 2011: Amazon introduces the Kindle Fire

40. Kindle Fire Offering • 18 million movies, TV shows, songs, magazines • Amazon Appstore - thousands of apps and games • Cloud-accelerated web browsing - Amazon Silk • Free cloud storage for Amazon content • Color touchscreen with extra-wide viewing angle • Priced at $199 for 7-inch Wi-Fi Version • Fast, powerful dual-core processor • Amazon Prime members get unlimited, instant streaming of 10,000 popular movies and TV shows

41. Why Apple isn’t killing Kindle MP3 User Music Video TV Games Dvpr Web HTML eBooks Publi Calls User © 2012 Parker & Van Alstyne You can’t make calls … unless you load Skype. Amazon is also being much more sophisticated about giving free data storage service, which allows them to better “consummate the match.”

43. © 2011 Eisenmann, Parker & Van Alstyne 43 Openness vs. Control YourShare Industry Value Add Open Proprietary Your reward = (Value added to industry) x (Your share) Based on: Shapiro & Varian ‘99 Maximum protection ≠ Maximum Value

44. 44 − Open to “.com” Open gift store − Open to developers − The Rise & Ignominius Fall of MySpace – Business Week 2011 Does Openness Work? While Facebook focused on creating a robust platform that allowed outside developers to build new applications, Myspace did everything itself. ``We tried to create every feature in the world and said, `O.K., we can do it, why should we let a third 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.''

45. Historical Open Innovation Hay Carrier RacecarFlour Mill Mobile ChurchFord Model T Snowmobile Sawmill Goat Carrier

46. 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 You don’t need to own this

47. 47 What does controlling openness 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

48. Models for Organizing Platforms D ell Users Dvprs Ac er … H P Re d Ha t De bi an U bu nt u … 4) Shared: e.g. Linux Users Dvprs Sponsor 2) Licensing: e.g. Google Android Providers One Provider Many Providers 3) Joint Venture: e.g. Orbitz Sponsors Users Provider Dvprs Users Dvprs Provider Sponsor 1) Proprietary: e.g. Mac One Sponsor Many Sponsors

49. 49 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

50. 50 Microsoft opened much more of its ecosystem • Microsoft had 6-10X developers • Open APIs / Cheap SDKs • Controlled OS, licensed. • Strong network effects. Del l Users Dvprs MS Windows IBM … HP

51. 51 For real profits, control full layer D ell Users Dvprs Ac er … H P Re d Ha t De bi an U bu nt u … 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

52. 52 Danger! Users Dvprs Sponsor Watch for new control points closer to customer. Providers Microsoft fear of Netscape Facebook fear of Instagram AT&T fear of Apple Apple fear of Google Maps SAP fear of ADP

53. Should Apple have opened the iPod? 53 No! It does 1 thing only, so make it “insanely great” and own it. Most firms can only concentrate on most valuable apps Profits increase when others add to platform’s “Long Tail”

54. Should Apple have opened the iPhone? Most firms can only concentrate on most valuable apps Profits increase when others add to platform’s “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.

55. 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-books Example: Microsoft Windows absorbed web browsing Example: Google added Gdrive to absorb functions of DropBox

56. Anything else to absorb? Apps offered by Platform Sponsor Apps offered by Developers

57. 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.

58. • Thingiverse is a digital space to upload new designs • Users have submitted product improvements that can be printed on the platform itself • Tested & user reviewed features become std MakerBot: A self-evolving Platform © 2013 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com

59. Why Platforms Beat Products • Based on owned resources, innovation occurs at a given rate. • Harnessing 3rd party resources, innovation can occur at a higher combined rate. • Even if a platform starts behind or has higher variability, its value can overtake the product leader. Time ValueAdded

60. 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 Porter’s Five Forces & Resource Based View © 2013 Parker, Van Alstyne & Choudaryter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com

61. Platform Strategy Differs © 2013 Parker, Van Alstyne & Choudaryter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com 1. Goal is transactions volume & creating customer value. Network effects provide sustainability.

62. Platform Strategy Differs © 2013 Parker, Van Alstyne & Choudaryter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com 1. Goal is transactions volume & creating customer value. Network effects provide sustainability. 2. Boundaries can be altered

63. Platform Strategy Differs © 2013 Parker, Van Alstyne & Choudaryter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com 1. Goal is transactions volume & creating customer value. Network effects provide sustainability. 2. Boundaries can be altered 3. Competition is multi-layered, more like 3D chess.

64. 1. Goal is transactions volume & creating customer value. Network 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 to join you! Platform Strategy Differs © 2013 Parker, Van Alstyne & Choudaryter: @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

65. Where do threats come from? 65 Porter’s 5 Forces – Compliments of Wikipedia

66. Product Features Firms generally consider product feature overlap (differentiation?) to find and benchmark competition. Eisenmann, Parker, Van Alstyne, “Platform Envelopment.” Strategic Management Journal, 2011. Zune / iPod Zune / Sony PSP Zune / iPhone

67. T A T A Network Users Platform Providers T A User overlap between Platforms predicts competitors. Size (usually but not always) predicts victor. High Overlap Low Overlap Asymmetric Overlap Eisenmann, Parker, Van Alstyne, “Platform Envelopment.” Strategic Management Journal, 2011.

68. Platform Ecosystem Rules 68 • Platforms beat products every time. • Remake the supply chain to “consummate the match.” • Open the top or the bottom of your platform to unexpected innovation, but don’t open both. • Look to your overlapping users to see where tough competitors will attack

69. THANK YOU QUESTIONS & DISCUSSION © 2013 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com marshall@mit.edu Twitter: @InfoEcon Find research HERE. Find blog posts HERE.