ers in the ecosystem that create or use
complementary innovations, the more
valuable the platform (and the complements) become. This dynamic, driven
by direct or indirect network effects or
both, encourages more users to adopt
the platform, more complementors
to enter the ecosystem, more users to
adopt the platform and the complements, almost ad infinitum.
Art in
Development
and Internet services. The company
that makes the platform is unlikely to
have the resources or capabilities to
provide all the useful applications and
services that make platforms such as
the PC or the smartphone so compelling for users. Hence, to allow their
technology to become an industrywide
platform, companies generally must
have a strategy to open their technology to complementors and create economic incentives (such as free or low
licensing fees, or financial subsidies)
for other firms to join the same “
ecosystem” and adopt the platform technology as their own.
IllustratIon by JoHn Hersey
A second key point is that, as various authors have noted, the critical
distinguishing feature of an industry
platform and ecosystem is the creation
of “network effects.” These are positive
feedback loops that can grow at geometrically increasing rates as adoption
of the platform and the complements
rise. The network effects can be very
powerful, especially when they are “di-
rect,” such as in the form of a technical
compatibility or interface standard—
which exists between the Windows-Intel PC and Windows-based applications or between VHS or DVD players
and media recorded according to those
formats. The network effects can also
be “indirect,” and sometimes these are
very powerful as well—such as when an
overwhelming number of application
developers, content producers, buyers
and sellers, or advertisers adopt a particular platform that requires complements to adopt a specific set of technical standards that define how to use
or connect to the platform. We have
seen these kinds of interface or format
standards, and powerful network effects, with the Windows-Intel PC and
application development services on
the eBay, Google, Amazon, and Facebook social networking portals as well
as new electronic book devices, among
many others.
Most important with a network effect is that the more external adopt-
standards Are not Platforms
We have seen many platform-like battles and network effects in the history of
technology, mainly in cases with incompatible and competing standards. It is
important to realize, though, that standards by themselves are not platforms;
they are rules or protocols specifying
how to connect components to a platform, or how to connect different products and use them together. Prominent
historical examples of platforms incorporating specific standards include
the telegraph, telephone, electricity,
radio, television, video recording and,
of course, the computer. Understanding how standards initiatives are likely
to play out is often an essential part of
understanding which platform is likely
to win the majority of a market, if one
winner is likely to emerge.
Not surprisingly, there has been a
growing amount of both theoretical
and empirical research on industry
platforms, particularly in economics but also in strategy and management of technology. Competition in
the consumer electronics and computer industries spurred a great deal
of thinking on this topic beginning in
the early 1980s, just as the arrival of the
Web did in the mid-1990s. Influential
early work by economists mostly took
the form of theory and models with few
detailed case studies. This is still a relatively new topic and there are few large-sample studies. But the key concepts
are all there—how platform industries
or products are affected by standards
and technical compatibility, the phenomenon of network or positive feedback effects, and the role of switching
costs and bundling.
5 Switching costs
and bundling have become strategically important because companies often can attract users to their platforms
by offering many different features for
one low price, and can retain users by
making it technically difficult to move
