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Product to Platform & OpenBusiness ModelsGeoffrey Parker Marshall Van AlstyneTulane University & MIT Boston University & MITgparker@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
3© 2013 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com
These Grew Fastest
4© 2013 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com
These are Platforms
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 CAPApple 474
Exxon Mobile 433
Google 361
Microsoft 332
Berkshire Hathaway 314
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%
0%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
MKT
CAP
Wei
ghte
d Pl
atfo
rm
Firm
s
7© 2013 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com
The Product Business Model is Broken
© 2013 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com
8© 2013 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com
The Product Business Model is BrokenIn 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© 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.
10© 2013 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com
Apple Feb 5, 1996
Michael Dell - ”Shut it down and give the money back to the shareholders.”
11© 2013 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com
Interbrand: 2013 Best Global Brands
12© 2013 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com
Nike Builds a Biz Platform
© 2013 Cisco and/or its affiliates. All rights reserved.13
© 2013 Cisco and/or its affiliates. All rights reserved.14
How would you create a platform around spice?
© 2013 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com
© 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 recipes4. Mix new combinations,
help users create & upload, allow ratings, build a community
How would you create a platform around spice?
© 2013 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com
16© 2013 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com
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 platformSystem must provide a useful and embeddable function or service and provide 3rd party access.
Examples:iTunes: get music onto iPodSAP: execute ERP systemsFacebook: connect family, friends & acquaintancesSmart Grids: capture AC/DC sources, route powerNike Fuel: motion capture and social benchmarking Pearson: match people to content, deliver content, certify learning
Products have featuresPlatforms 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 SellersAirlines/Hotels
Xbox DevelopersVisa Merchants
DoctorsYouTube Videographers
AirBnb RoomsElectric Car Charge Stations
Mechanical Turk LaborersMonster EmployersAndroid Developers
eBay BuyersTravelers
Xbox GamersVisa CardHolders
PatientsYouTube ViewersAirBnb Renters
Electric Car DriversMechanical Turk JobsMonster Employees
Android Users
Each Side Attracts More of the Other
27
Biz CustBizBiz CustCust
Platform
Pric
e
Quantity
Pric
e
Quantity
Market Biz Market Cust
q1 q2
p1 p2
Creating a B2C Platform
28
Setting Price on a Network Platform
Platform
Pric
e
Quantity
Market One
q1
p1
29
Setting Price on a Network Platform
Platform
Pric
e
Quantity
Market One
q1
p1
Pric
e
Quantity
Market Two
q2
p2
30
Pric
e
Pric
e
Market One Market Two
Quantity Quantityq1
q2p1
p2
Platform
p1
q1
p2
q2
Creating a B2C Platform
31
Pric
e
Market Two
Quantityq1
p1
p1
q1
Pric
eMarket One
Quantityq2
p2
p2
q2
Platform
Setting Price on a Network 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 ProducerListener
$
(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 ProducerListener
$
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
0.32
0.47
0.21
Message for you: A great standalone product might not be sufficient.
2007 Today
$30/share
$4/share
2007 Today
$53/share
$23/share
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.
PolycomSpeakerphone
R1P1 U1 R1P1 U1
CiscoFlip Camera
R1P1 U1
HPCalculator
Photo
Usr Upld
Flickr
Blkbry
Usr Dvpr
RIM
eRdr
Usr Upld
Sony
Why Apple isn’t killing KindleWe 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
Your
Sha
re
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
SnowmobileSawmill
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 Access2) Extend Platform3) Touch Customers4) Change Platform
Platform Provider
Side 1 Side 2
Platform Sponsor
Side 1 Side 2
Platform Provider
Platform SponsorPlatform
Models for Organizing Platforms
Dell
Users Dvprs
Acer …H
PRed
Hat
Debian
Ubuntu
…
4) Shared: e.g. Linux
Users Dvprs
Sponsor2) Licensing: e.g. Google
Android
Providers
One Provider Many Providers
3) Joint Venture: e.g. Orbitz
Sponsors
Users
Provider
Dvprs
Users Dvprs
ProviderSponsor
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.
Dell
Users Dvprs
MS Windows
IBM … HP
51
For real profits, control full layer
Dell
Users Dvprs
Acer …H
PRed
Hat
Debian
Ubuntu
…
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
AT&T fear of Apple
Applefear of
Google Maps
SAPfear 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
Profits increase when others add to platform’s
“Long Tail”
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.
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-booksExample: 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
Valu
e A
dded
1. Goal is a protected market niche, emphasizing industry barriers
2. Categories are sharp3. 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 & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com
Platform Strategy Differs
© 2013 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com
1. Goal is transactions volume & creating customer value. Network effects provide sustainability.
Platform Strategy Differs
© 2013 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com
1. Goal is transactions volume & creating customer value. Network effects provide sustainability.
2. Boundaries can be altered
Platform Strategy Differs
© 2013 Parker, Van Alstyne & ChoudaryTwitter: @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.
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 & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com
Owned / inimitableresources
Profits increase when others add
to platform’s Long Tail
You don’t need to own this
Where do threats come from?
65Porter’s 5 Forces – Compliments of Wikipedia
ProductFeatures
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
NetworkUsers
PlatformProviders 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 YOUQUESTIONS & 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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