platform shift: how new business models are changing the shape of industry - marshall van alstyne

Barcelona, Spain • October 29-31, 2014

© 2014 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com

Marshall Van AlstyneBoston University & MITmarshall@mit.eduInfoEcon@twitter.com

Platform Shift: How New Biz Models Are Changing the Shape of Industry

I ♥ APIs September 9, 2014

© 2014 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com

InterBrand: 2014 Best Global Brands

© 2014 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com

These Grew Fastest

© 2014 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com

These are Platforms

© 2014 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com

Dominated by Platforms

© 2014 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com

Platform Firms Becoming More Important in Economy

3 of top 5 firms in 2014 by market cap.

FIRM MARKET CAP

Apple 598

Exxon Mobile 416

Google 398

Microsoft 385

Berkshire Hathaway 340

© 2014 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 (2001-2014)35

%

30%

25%

20%

15%

10%

5%

0%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2014

MK

T C

AP

Weig

hte

d P

latf

orm

Fir

ms

Platforms Draw Value from Network Effects

© 2014 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com

© 2014 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com

Network Effects

Value rises as more people use the platform

Metcalfe’s Law

© 2014 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com

Network Effects

Value rises as more people use the platform

Source: David Sacks

In any market with network effects, the focus of attention must shift from inside to outside

the firm.

© 2014 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com

Reason: You can’t scale network effects inside as easily as outside.

Source: Marshall Van Alstyne

To have an external focus,

you must have an API strategy.

... this implies ...

© 2013 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com

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.

Bezos Platform Mandate

© 2014 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com

Source: Yegge Rant

See ‘’Platform Envelopment’’ (2011) Strategic Management Journal, Eisenmann, Parker & Van Alstyne

© 2014 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com

Platforms Beat Products Every Time

© 2014 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com

Apple iPod pre-Platform

(1)Product First Thinking(2)Standard linear value

chain

(3) User bought music retail (or P2P)(4) Minimal network effects

Music Produce

r

Listener

Apple iPod

Retailer

$ $ $

© 2014 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com

Apple iPod Combined with iTunes

Music Produce

r

Listener

Apple iPod

Retailer

$ $ $

© 2014 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com

Apple iPod post-Platform

(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

$$

UserConte

nt

Apple

© 2014 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com

Sony could have done this. It has many great standalone products.Google is not making this mistake with Android

How Apple is Killing Standalone Platforms

Lumia

UsrDvp

r

PSP

UsrGam

MP3

User

Music

Video

TV

Games

Dvpr

Web

HTML

eBooks

Publi

Calls

User

Zune

Usr Mus

MicrosoftSonyNokia

Apple has vastly stronger network effects.

© 2014 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com

Zune

Usr Mus

Microsoft

How Apple is Killing Standalone Platforms

Lumia

UsrDvp

r

PSP

UsrGam

MP3

User

Music

Video

TV

Games

Dvpr

Web

HTML

eBooks

Publi

Calls

User

SonyNokia

So what happened?

2007

Today

$30/share $8/share

2007

Today

$53/share $19/share

© 2014 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com

Message for you: A great standalone product is not sufficient.

TomTomGPS

R1P1 U1 R1P1 U1

CiscoFlip Camera

R1P1 U1

HPCalculator

How Apple is Killing Standalone Platforms

MP3

User

Music

Video

TV

Games

Dvpr

Web

HTML

eBooks

Publi

Calls

User

Monetizing Platforms Means Free Pricing is Profitable

What changes? Prices

© 2014 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com

See ‘’Strategies for Two Sided Markets” (2006) Harvard Business Review Eisenmann, Parker & Van Alstyne

© 2014 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com

If markets are independent, collect profits in both.

Price

Quantity

Market One

q1

p1

Price

Quantity

Market Two

q2

p2

© 2014 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com

But if markets are coupled, discounting one builds demand in the other.

Price

Market One

Quantityq1

p1

p1

q1

Price

Market Two

Quantityq2

p2

p2

q2

© 2014 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com

There are 2 types of Free

1) Cellphones & Minutes, Razors & Blades

2) eBay, Amex, Google, Amazon all use 2-sided platform pricing.

Platform

Group 2Group

1

Platforms Open Themselves to Third Party Contributions

What Changes :: Innovation

© 2014 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com

© 2014 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com

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

Platforms Get Enormous Value from 3rd Party Developers

© 2014 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com

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

Valu

e A

dded

Goal shifts from control, entry barriers, and differentiation to more valuable market

exchanges.

What Changes :: Strategy

© 2014 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com

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

© 2014 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com

Platform Strategy Differs

© 2014 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 join you!

Platform Strategy Differs

© 2014 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

THANK YOU

QUESTIONS & DISCUSSION

© 2014 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com

marshall@mit.edu

Twitter: @InfoEcon

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