Platforms Transitions

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

2© 2013 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com
InterBrand: 2013 Best Global Brands

These Grew Fastest

These are Platforms

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

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

The Product
Business
Model is Broken
© 2013 Parker, Van Alstyne & Choudaryter: @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%

1980-2000 Microsoft Platform Beats Apple
Product
Apple launched the PC revolution but Microsoft
licensed widely, built a huge developer ecosystem, 6X larger.

Apple Feb 5, 1996
Michael Dell - ”Shut it down and give the money back
to the shareholders.”

Interbrand: 2013 Best Global Brands

Nike Builds a Biz Platform

How would you create a platform around
spice?

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?

Create a whole geometry of flavor
combinations

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

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

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

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

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

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

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
Biz CustBizBiz CustCust
Platform
Price
Quantity
Price
Quantity
Market Biz Market Cust
q1 q2
p1 p2

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

29
Platform
Price
Quantity
Market One
q1
p1
Price
Quantity
Market Two
q2
p2

30
Price
Price
Market One Market Two
Quantity Quantity
q1
q2
p1
p2
Platform
p1
q1
p2
q2

31
Price
Market Two
Quantity
q1
p1
p1
q1
Price
Market One
Quantity
q2
p2
p2
q2
Platform

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.

Why do platforms beat products?

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

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
$$

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

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

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

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

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.”

© 2011 Eisenmann, Parker & Van Alstyne
Open (fragmented) versus
Closed (integrated)
?

© 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
− 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.''

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

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
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

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
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
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
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
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

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
“Long Tail”

Should Apple have opened
the iPhone?
Most firms can only
concentrate on most
valuable apps
“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.

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

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

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.

• 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

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

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

Platform Strategy Differs
1. Goal is transactions volume
& creating customer value.
Network effects provide
sustainability.

sustainability.
2. Boundaries can be altered

sustainability.
3. Competition is multi-layered,
more like 3D chess.

sustainability.
3. Competition is multi-layered,
more like 3D chess.
4. Don’t need to own inimitable
resources. Have them to join
you!
Owned / inimitable
resources
Profits increase
when others add to
platform’s Long Tail
You don’t need to
own this

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

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

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.

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

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.

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