Platforms (Gawer) =
Platforms (Gawer) = are evolving organizations or meta-organizations that:
o Federate and coordinate constitutive agents who can innovate and compete
o Create value by generating and harnessing economies of scope in supply or demand
o Entail modular architecture composed of core and periphery.
Direct network effects
Direct network effects
= When the value of a good to an user increases with the number of other users (installed base) of the same or similar
Indirect network effects =
Indirect network effects = the presence of other type of actors (e.g., complementors) generates additional value.
Platform Builder’s Checklist (Edelman)
1 Amass a large user base
* Leverage existing user groups
* Use publicly available data as substitute for one user group (Amazon Marketplace)
2 Offer stand-alone value
* Service that is useful even if few others join the platform
* Service for one side initially (Google, Whatsapp)
3 Plant a seed by recruiting marquee users
* Pay them to join, or for initial creation of content (e.g., Android)
* Create ‘fake’ content (Tinder)
* Buy a marquee brand (brand that achieved a high level of public awareness)
4 Reduce users’ risks
* Offer pay-as-you-go pricing
* Subsidize early users
5 Ensure Compatibility with Legacy Systems
Modularity (Baldwin & Clark) =
a module is a unit whose elements are powerfully connected among themselves and relatively weakly connected to elements in other units.
Modularity can be created by…
+
How does modularity help?
Modularity can be created by… standardizing interfaces between units.
How does Modularity help?
1. Modularity helps manage complexity by breaking up a complex system into discrete components which interact through standardized interfaces and architecture.
- Reduces the interdependencies between modules to simple interconnectivity rules
+
Reduces the scope of information that designers need to design their modules – facilitates autonomous innovation within modules.
Layered Modular Architecture of Digital Technology:
Layered Modular Architecture of Digital Technology:
1. Content Layer: (scripts, recipes, programs)
- Service Layer (apps)
- Network Layer
- Logical Transmission (WiFi)
- Physical Transport (Router) - Device Layer
- Logical Capability (LED light bulb)
- Physical Machinery (iPhone)
Platform (architecture) =
+ Advantages
+ Disadvantagres
Platform architecture = a set of core components (and interfaces) with low variety and a complementary set of peripheral components with high variety
Advantages
- Reduced costs of production (e.g., economies of scale)
- Shared components between models
- Reduced R&D lead times
- Reduced systematic complexity
- Improved ability to update products
- Customization by (re)combining components
Disadvantages:
- Decreasing distinctiveness
- Suboptimization
Advantages Propriety System:
Advantages Propriety System =
o Appropriate Value
o Control over fragmentation
o Incentives for architectural control
Advantages Open System =
Advantages Open System =
o Economies of Scope in production and innovation
o Ensure rapid diffusion
o Overcome industry opposition against sole-source technology.
Platform:
Advantages
Platform:
Advantages:
o Creation of significant value by enabling communication and commerce that might not otherwise occur
o Modest operating costs
o Network effects users rarely leave the platform
Can I attract a large group of users at once? (Edelman - Platforms)
Can I attract a large group of users at once?
A platform can do this if at least one of the two conditions is true:
- Company already has the users it needs on another platform (e.g. Google Adsense launch reached out to users from Google Analytics)
- User data is publicly available (Collect data from public sources encourage users to improve data charge companies for preferred ad placement)
Three-step process for launching an advertising-supported platform:
- Collect data from public sources and organize it to create a useful service
- Encourage users to submit improved data directly to the platform
- Charge companies for preferred ad placement
Can I offer stand-alone value? (Edelman - Platforms)
Can I offer stand-alone value? (Edelman - Platforms)
If a large number of users is not feasible, look for ways of providing value to individual users even when no one else is on the platform.
TWO STRATEGIES:
- Start with an industry niche: target customers in a relative narrow market where the platform can more readily gain traction.
2.* Find or build small social groups: identifying and serving the social needs of small groups.
- Start with an industry niche: target customers in a relative narrow market where the platform can more readily gain traction.
. How will I build credibility with customers? (Edelman - Platforms)
How will I build credibility with customers?
* Attract a marquee platform contributor (e.g. game consoles pay a well-known game developer to provide a given game on the specific console)
How should I charge users? (Edelman - Platforms)
How should I charge users? (Edelman - Platforms)
- Pay-as-you-go (e.g. Groupon only charges restaurants when consumers buy a voucher): reduces the risk of a platform for some type of users – needs technology to record individual transactions automatically.
- User subsidies (e.g. early Lyft drivers were paid to only be ‘on-call’ and users were given 5 free rides. Also: Google Maps provides free user services to obtain a large base of users making the value of the platform higher for advertisers)
Platforms (Economic Theory)
Create value by:
Create value by acting as conduits between two categories of consumers who would not have been able to connect or transact without the platform.
Value is created through coordinating, which is effected through pricing.
Platforms (Economic Theory)
+ 2 limitations
Create value by acting as conduits between two categories of consumers who would not have been able to connect or transact without the platform.
- Value is created by coordinating which is effected through pricing.
o How markets mediate transactions across different customer groups and how network effects fuel platform competition: platforms as a market.
o Network effects trigger a self-reinforcing feedback loop that magnifies incumbents’ early advantages
o Strong network effects can drive competition between platforms to a ‘winner-take-all’ outcome.
Limitations:
1. Platforms are taken to be both exogenous and fixed – do not offer much insight into what determined how or why they would evolve
2. The nature of the relationship between platform owner and two sides is reduced to that of seller-buyer relationship – both ends defined as consumers (even the developers)
Thus, offering a static, demand-side view of platform competition.
Platforms (Engineering Design)
+ 2 limitations
o View product platforms as technological designs that help firms generate modular project innovation: platforms as technological architectures.
o Platform technological architecture is not only modular but also structures around a core and a periphery = the platform itself is constituted by the stable core of the product system.
o Re-use of components across different products within a product family, which allows economies of scope in production to occur.
Economies of scope = when the cost of joint production is less than the cost of producing each output separately.
Economies of scope in innovation = the cost of jointly innovating on product A and B is lower than the cost of innovating on A independently of innovating on B.
Because of modularity:
- helps to manage complexity by breaking up complex systems into discrete componetns which interact through standardized interfaces and architecture
- reduces the interdependencies between modules to simple interconnectivity rules and reduces the scope of information that designers need to design their modules – facilitates autonomous innovation within modules
Two limitations:
- Sees essentially platforms as structurally stable, and therefore does not help explain how platforms themselves evolve:
Stable because: innovation happens on modules, within stable system architectures, and facilitated by stable interfaces; this view therefore does not help explain how platforms themselves evolve - Does not provide insights on competition between platforms (which economics does) and fails taking into account the possible completion between owners and complementors (which economics also does).
Economies of scope in innovation =
Economies of scope in innovation = the cost of jointly innovating on product A and B is lower than the cost of innovating on A independently of innovating on B.
Managing open innovation with complementors (around digital product platforms)
- External actors develop increasingly complex connections to a platform:
3 types:
1) Dedicated complements connecting to a focal platform only
2) Complements that bridge a focal platform and other products
3) Embedding the focal platform in a boarder platform with an open-ended set of connections to other products and services.
–> these increasingly complex connections with complements extend beyond what was intended and foreseen by focal platform owners
o third parties’ innovations not only yields:
a variety of complementary products that address Heterogeneous user needs,
o but also new recombination and integrations beyond the original platform.
- Open innovation on digital products may require a hybrid open innovations approach
- Connections created by complementors can span multiple platforms, leading to an ecology of platforms.
* Connections created by independent third parties go beyond the full technical and organizational control of platform owners
* Therefore, platform owners should recognize that complementors are nested in multiple platform ecosystems, which requires a different approach of managing access to and control of their platform.
* When every update of a digital platform can have far reaching consequences for the stability and quality of the user experiences – possibly jeopardizing the integrity of the entire system – platforms become path dependent and less attractive for generating innovations.
