The document discusses strategies for app platforms based on literature on two-sided markets and platform management. It outlines the key strategic issues platforms face in three phases: design, launch, and competition. In design, platforms must decide fees, quality controls, and which side to subsidize. In launch, platforms focus on attracting both developer and user sides and determining openness. In competition, platforms assess factors influencing "winner-take-all" dynamics like costs of multi-homing. Theories of two-sided markets and platforms provide insights but further empirical research is needed.

1. Business models in two-sided markets:
an assessment of strategies for app
platforms
ICMB Delft
Iana Kouris, Robin Kleer
RWTH 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 well
as assessment of key stakeholders we analyze strategies in the app platform
industry
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 other's 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)
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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 sellers
SOURCE : 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)
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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
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13. During the design phase platform should check, if it can apply “coring”, then make
decisions 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 on
board, 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
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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)
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