Platform design - governance and openness

Hi. Today we want to talk about platform design. Specifically, we will get to know two distinct types of platforms.

We will then talk about platform governance, the trade-off between exclusivity and openness and discuss models for managing and sponsoring platforms. We can distinguish broadly between two types of platforms. Innovation platforms and transaction platforms.

What are innovation platforms? These platforms serve as a technological foundation upon which other firms develop complementary innovations. Think of video game consoles as an example.

Distinct from that are transaction platforms. These are the platforms that serve as an intermediary for direct exchange or for direct transactions. Think of eBay,  Airbnb, Uber or Tinder, and so on.

Now what’s interesting is that sometimes the same firm operates both types of platforms at the same time. Think of Google. They operate an innovation platform, the Android Operating System, that provides the technological foundation for app developers to produce software.

These apps can be found by consumers in the Google Play Store – which is a transaction platform. Ok great – now let’s look under the hood and think a bit about platform architecture. We can basically think of three building blocks: value units, interactions, and governance.

When building a platform, you start by defining the value unit. This is the core of the platform: on Google’s Play Store it’s the songs, movies and apps. The value units of Airbnb are apartments.

Next, you design the interaction around it. How can market participants access the value units of your platforms? To do that you will set rules and define a system of governance.

A central part is often to make use of network effects, data that is generated by platform participants, and so on. Depending on whether your platform is a transaction platform or an innovation platform – governance can be quite different. What are governance mechanisms in transaction platforms?

Who can connect to the platform, and what can each market-side do on the platform? The issues that need platform governance include the minimization of low-quality transactions, the weeding out of low-quality complementors, to facilitate returns in case of unsatisfied customers and of course, to avoid fraud. Some of these issues can be solved by clever design, while others need an active role.

This involves checking the credentials of users or complementors, curating content, and so on. How does platform governance look like in innovation platforms? Who can innovate on top of the platform and how can we ensure the desired quality of complements?

The issues that platform governance needs to solve include technological standards, intellectual property rights, balancing complementor incentives and competition, to name just a few. Again, some issues such as balancing complementor incentives, vertical integration and application programming interfaces, can be solved by clever design. Quite related to the solving the governance issues is the question of how to organize and orchestrate the setting and enforcing of rules.

Here is a simple model that can be helpful to think about the organization of platform governance. Essentially, you have to decide on how open your platform should be. There are two roles you or others can play: management and sponsorship.

Platform managers organize and control interactions, while platform sponsors control the overall architecture, the underlying intellectual property, and the allocation of other rights. Think of it as a 2x2 matrix. Who is managing, who is sponsoring?

One organization, or many organizations? In the upper left box, there is one manager and one sponsor. Let’s call this the proprietary model.

This is where most of the transaction platforms live. The other extreme is in the lower right box. Many managers and many sponsors.

We can call this the shared model. The model with many managers and one sponsor is called the licensing model. In contrast, with one manager and many sponsors we speak of a joint venture model.

The key organizational question is: do you want to manage and sponsor your platform, or do you want others to manage and or sponsor it? The answer has to do with solving the trade-off between exclusivity and openness. Think of it this way: How much do you as a platform get from the value that the platform creates versus how much value can complementors extract?

Solving this trade-off lets you walk on the optimal path that will maximize the platform’s profits. Let’s look at a few examples. Sometimes, platforms can be too closed, meaning that the industry value added is very small and that the platform is creating little value.

So, by taking a too large share, you are losing additional value. An example are set-top boxes, to access cable TV. They were often too closed, there was no possibility for third parties to add additional value.

Note how this is different with modern versions, such as the Amazon Fire Stick that lets you install apps, browse the internet, and so on. On the contrary, platforms can be too open to be commercially viable. Think of open source software – which creates a lot of value, but it is impossible for one firm to capture it.

The operating system Linux is so open that it is difficult to control and make money. Let me sum up. Today we talked about two types of platforms: transaction and innovation, as well as the governance needed to solve issues for each one of them.

In addition, we covered the four models for managing and sponsoring platforms. Finally, we talked about platform design and the trade-off between exclusivity and openness.