Platform Shift: How New Business Models are Changing the Shape of Industry - Marshall van Alstyne

Platform Shift: How New Biz Models
Are Changing the Shape of Industry
Marshall Van Alstyne
Boston University & MIT
marshall@mit.edu
InfoEcon@twitter.com
Barcelona, Spain • October 29-31, 2014
I ♥ APIs September 9, 2014
Twitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com © 2014 Parker, Van Alstyne & Choudary

InterBrand: 2014 Best Global Brands

These Grew Fastest

These are Platforms

Dominated by Platforms

Platform Firms Becoming More Important in Economy
FIRM MARKET CAP
Apple 598
Exxon Mobile 416
Google 398
Microsoft 385
Berkshire Hathaway 340
3 of top 5 firms in 2014 by market cap.

Platform Firms Becoming More Important in Economy
Percentage of Platform Firms weighted by MKT CAP
(2001-2014)
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2014
%of top 20 firms by market cap since 2001
35%
30%
25%
20%
15%
10%
5%
0%
MKT CAP Weighted Platform
Firms

Platforms Draw Value from Network Effects

Network Effects
Value rises as more people
use the platform
Metcalfe’s Law

Network Effects
Value rises as more people
use the platform
Source: David Sacks

In any market with network effects, the focus of
Reason: You can’t scale network effects inside as
attention must shift from inside to outside the firm.
easily as outside.
Source: Marshall Van Alstyne

... this implies ...
To have an external focus,
you must have an API
strategy.

Bezos Platform Mandate
1. All teams will expose their data…
2. Teams must communicate
through interfaces.
3. … no other form of interprocess
communication allowed
4. Interfaces, without exception,
must be externalizable.
5. Anyone who doesn’t do this will
be fired.
Source: Yegge Rant

Platforms Beat Products Every Time
See ‘’Platform Envelopment’’ (2011) Strategic Management Journal, Eisenmann, Parker & Van Alstyne

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

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

Apple iPod post-Platform
User Content
Apple
(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
Dvp
r
PSP
Usr
Ga
m
Nokia Sony Microsoft
User Music
MP3
Video
TV
Games
Dvpr
Web
Usr Mus
Zune
HTM
L
eBook
s
Publi
Calls
User
Sony could have done this. It has many great standalone products.
Apple has vastly stronger network effects.
Google is not making this mistake with Android

Usr Mus
Zune
Microsoft
2007 Today 2007 Today
Lumia
Usr
Dvp
r
PSP
Usr
Ga
m
Nokia Sony
User Music
MP3
Video
TV
Games
Dvpr
Web
HTM
L
eBook
s
Publi
Calls
User
So what happened?

P1 R1 U1 P1 R1 U1
TomTom
GPS
Cisco
Flip Camera
P1 R1 U1
HP
Calculator
User Music
MP3
Video
TV
Games
Dvpr
Web
HTM
L
eBook
s
Publi
Calls
User
Message for you: A great standalone product is not sufficient.

What changes? Prices
Monetizing Platforms Means Free Pricing is Profitable
See ‘’Strategies for Two Sided Markets” (2006) Harvard Business Review Eisenmann, Parker & Van Alstyne

Price
Market One
Quantity
q1
p1
Price
Market Two
Quantity
q2
p2
If markets are independent, collect profits in both.

Price
Market One
q1
Quantity
q1
p1
p1
Price
Market Two
q2
Quantity
p2
p2
q2
But if markets are coupled, discounting one builds demand in the
other.

There are 2 types of Free
1) Cellphones & Minutes,
Razors & Blades
2) eBay, Amex, Google,
Amazon all use 2-sided
platform pricing.
Platform
Group 2
Group
1

What Changes :: Innovation
Platforms Open Themselves to Third Party
Contributions

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
You don’t need to
own this

 Consider product innovation alone
 Harnessing 3rd party resources,
innovation occurs at a higher
combined rate
 Even if a platform starts behind, its
value overtakes the product leader
 ‘’Permissionless Innovation”
protects information asymmetry.
 Not only does this fill ecosystem
space, hard problems get solved by
multiple attempts.
 Shed costs, keep 30% gains!
Why Platforms Beat Products
Time
Value Added

What Changes :: Strategy
Goal shifts from control, entry barriers, and
differentiation to more valuable market exchanges.

Porter’s Five Forces & Resource Based View
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

Platform Strategy Differs
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.

Platform Strategy Differs
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 join you!
Owned / inimitable
resources
Profits increase when others
add to platform’s Long Tail
You don’t need to
own this

THANK YOU
QUESTIONS & DISCUSSION
marshall@mit.edu
Twitter: @InfoEcon
Find research HERE. Find blog posts HERE.

Platform Shift: How New Business Models are Changing the Shape of Industry - Marshall van Alstyne

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Platform Shift: How New Business Models are Changing the Shape of Industry - Marshall van Alstyne