Hi! Today’s topic is platform competition. Since we’re dealing with complex issues, we will break it down into several elements.
This will be useful to think about strategies for how platforms can govern and regulate the markets that they create. As always we’ll discuss a few examples along the way. A key takeway of today’s video is that platform strategy is multi-dimensional and complex.
We can think about platform strategy as dealing with dynamic tradeoffs involving competition on three different levels. The first level is platform against platform, such as Facebook against Twitter, Google against Bing, etc. This is competition between platforms.
The second level is platform against complementors, which opens up questions of competition within platforms. And this is also related to the third level: complementors against complementors. In transaction-based platforms, this would be buyers against buyers or sellers against sellers, and in innovation-based platforms, this would be developers against developers.
What makes things even more complex is that circumstances are dynamic, and things change over time. Not everything is under control by the platform owner, and we can say that platform ecosystems co-evolve through the exogenous evolution and competition of complementors and end-users. Ok – let’s dig a bit deeper on each of the three levels of platform competition.
First up is competition between platforms. With platforms, competition for the market is often more important than competition in the market. How come?
That’s because of network effects that naturally lead to concentration, where one platform is dominant. The utility of users depends on the number of other users. Competition for the market is particularly prevalent when - platforms are symmetric in their market and technology positions.
For example when no platform has a lower quality than the others. Competition for the market also becomes more likely if - the competition itself does not delay consumer acceptance of the technology. If that is the case then firms often join forces, for example by agreeing on standards.
We also rather see competition for the market if competition in the market is likely to dissipate potential industry profits. What are strategies that firms can use when competing for the market? It turns out that this boils down to strategies to manage network effects.
You can try to establish a large installed base right in the beginning and do everything you can to make that visible. One way to achieve this is with introductory pricing, so setting prices low at first to attract users, while constantly advertising that many users have already joined your platform. Put differently you want to manage consumers’ expectations.
You also want to make sure that users don’t think that you will be increasing prices later. A second strategy is therefore to publicly commit to a low pricing strategy in the long run. Don’t forget to also manage expectations of competitors and complementors.
One way to achieve that is to establish strategic alliances and orchestrate a sufficient supply of complements. You can also work on improving the relative quality of your platform or technology. Pre-emption might also be an option - simply being faster than competition.
But this of course represents a trade-off between timing and quality. Finally, an easy way to win the market may be to acquire a rival firm. Now let’s talk about competition within platforms.
A platform’s strategies in this context have a lot do with managing changes over time. What is the typical evolution of governance mechanisms? We can see that platforms reduce their dependencies on complementors over time, which often means that they’re closing the platform step by step.
As the platform’s benefit from complementors decreases over time and as more users are added on the other side, the platform often takes over and integrates some of the functionalities previously offered by complementors. The dynamics of the user-base are also interesting. Over time, more and more end-users enter the platform.
But this process tends to follow a s-shaped curve. Often late adopters are very different than the early adopters. For example their willingness-to-pay might be lower, they might be more risk averse and search less deeply.
Late adopters might therefore be less valuable customers for platform. Here is an example of how Sony managed the PlayStation 3 over its lifetime. The base product remains the same, but over 6 years in the market Sony kept adding features to the PlayStation and also lowered the price.
Maybe Sony did this to accommodate to the different types of consumers such as late-adopters who have a lower willingness-to-pay. Let’s now turn to the other market side. Let’s consider the evolution of the competition between complementors.
Also here, as time passes, more complementors will enter the platform. This is also going to follow some sort of s-shaped curve. As with end-users, the distribution of complementors is likely to change over time.
Maybe low-quality complementors enter particularly early, maybe they enter particularly late. Either way, it’s the job of the platform to monitor complementors and design governance rules to incentivize the right kind of complementors to join and stay on the platform. Here is an example of how governance has changed in the Apple iOS system.
Approximately one year after launch of the App Store, Apple added “in-app-purchases” as an additional mechanism for app developers to make money. This is 2009, and we are still in the early stages, where it’s very important for Apple to be adding more and more apps to attract consumers and of course sell iPhones. A bit later they also allowed in-app advertising.
But when there was a critical mass of apps, and when it was becoming increasingly difficult for consumers to find app that they really wanted to use, Apple had to change strategy. They first implemented user reviews and recommendations. Their focus shifted from getting as much apps as possible, to filtering out high-quality apps.
Step by step, they introduced a no-questions-asked return policy on app purchases, implemented a search algorithm that improves the matching of popular apps and then introduced paid search results. All of these are governance mechanisms that incentivize high-quality complements, by giving users the tools to test and find them. To sum up.
We have talked about the multi-dimensional and complex nature of platform competition. We also thought about a few strategies platforms can take to manage and regulate competition.
