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

1. Barcelona, Spain • October 29-31, 2015 © 2015 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com Marshall Van Alstyne Boston University & MIT marshall@mit.edu InfoEcon@twitter.com Platform Shift: How New Biz Models Are Changing the Shape of Industry Gartner Research Board March 11, 2015

6. 6© 2015 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com Platform Firms Becoming More Important in Economy 3 of top 5 firms in 2015 by market cap. FIRM MARKET CAP Apple 627 Exxon Mobile 385 Microsoft 377 Berkshire Hathaway 357 Google 344

7. 7© 2015 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 MKTCAPWeightedPlatform Firms

8. 8© 2015 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com The Product Business Model is Broken © 2015 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com

9. 9© 2015 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com The Product Business Model is Broken In 2009, BlackBerry had nearly 50% market share in U.S. operating systems, according to IDC. Now: 2.1% 2008 2009 2010 2011 2012 2013 50% 40% 30% 20% 10% 0%

10. 10© 2015 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com 1980-2000 Microsoft Platform Beats Apple Product Apple launched the PC revolution but Microsoft licensed widely, built a huge developer ecosystem, 6X larger.

14. 14

15. 15 1. Enumerate embeddable features: salty, citrus, sour, toasted, … 2. Get consumer preferences 3. Match to best recipes 4. Mix new combinations, help users create & upload, allow ratings, build a community How would you create a platform around spice? © 2015 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com

16. 16 Create a whole geometry of flavor combinations

17. 17© 2015 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com Products Have Features, Platforms Have Communities Definition: A platform is an open architecture together with a governance model. Platform Potential: System must provide a useful function or service and should provide 3rd party access. Platform Purpose: The goal of the platform is to consummate the match – more & better! Subgoals are seed creation & consumption.

18. Any enterprise that grows in value by adding information / community can be transformed. The greater the proportion of value, the sooner it will transform. © 2015 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com

19. © 2014 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com Services Protected by Credentialing, Complexity, Regulation & Hard Assets Consumer Goods Home Goods Automotive Conslt: Eden MacC Labor : oDesk $$$: eToro, Kickstr News : Twitter Insurance : ? Law : LegalZoom Education : edX Art & Craft : Etsy Apparel:Lee & Fung Shirts : Threadless Shoes : Nike Fuel Watches : Apple Thermostat : Nest Lighting : Philips Appliance : Haier Rides : Uber Cars : 3d Printed Cars : Mercedes Info & Tech Games : Nintendo Cloud : AWS Search : Google OS : MS Windows Maps : Google APIs PDF : Adobe Movies : Netflix

20. © 2014 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com Food & Agri Protected by Credentialing, Complexity, Regulation & Hard Assets Crop Yield : IBM Spices : McCormick Energy & Mining Heavy Industry Government Farming : eChoupal Mining : Gold Corp Utility : EnerNOC Tractors : Hitachi Engines : GE Predix City : Singapore Medicine Devices : Biomet MRI : Cohealo Healthcare:Harvard

21. SHIfT HAPPENS So Why Now? It’s more than SMAC Platforms Draw Value from Communities & Network Effects © 2015 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com

23. 23© 2015 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com How are these Related? Each Side Attracts More of the Other eBay Buyers Uber Riders Xbox Gamers Amex CardHolders Aga Khan Patients YouTube Viewers AirBnb Renters Tesla Car Drivers Mechanical Turk Jobs LinkedIn Employees Android Users eBay Sellers Uber Drivers Xbox Developers Amex Merchants Aga Khan Doctors YouTube Videographers AirBnb Rooms Tesla Charge Stations Mechanical Turk Laborers LinkedIn Employers Android Developers

25. More Android Users … get more Android Developers… More Android Developers … get more Android Users… © 2015 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com

26. In any market with network effects, the focus of attention must shift from inside to outside the firm. © 2015 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

27. Why Platforms Beat Products Every Time See ‘’Platform Envelopment’’ (2011) Strategic Management Journal, Eisenmann, Parker & Van Alstyne © 2015 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com

28. 28© 2015 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 Producer ListenerApple iPod Retailer $ $ $

29. 29© 2015 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com Apple Platform Apple iPod Combined with iTunes Music Producer Listener Retailer $ $ $ Apple iPod

30. 30© 2015 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 User Content Apple $$ $

31. 31© 2015 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 Usr Dvp r PSP Usr Ga m MP3 User Music Video TV Games Dvpr Web HTM L eBooks Publi Calls User Zune Usr Mus MicrosoftSonyNokia Apple has vastly stronger network effects.

32. 32© 2015 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com Zune Usr Mus Microsoft How Apple is Killing Standalone Platforms Lumia Usr Dvp r PSP Usr Ga m MP3 User Music Video TV Games Dvpr Web HTM L eBooks Publi Calls User SonyNokia So what happened? 2007 Today 2007 Today

33. 33© 2015 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com Message for you: A great standalone product is not sufficient. Polycom Speakerphone R1P1 U1 R1P1 U1 Cisco Flip Camera R1P1 U1 HP Calculator How Apple is Killing Standalone Platforms MP3 User Music Video TV Games Dvpr Web HTM L eBook s Publi Calls User

34. 34© 2015 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com MP3 User Music Video TV Games Dvpr Web HTM L eBooks Publi Calls User Photo Usr Upld Flickr Blkbry Usr Dvpr RIM GPS Usr Upld TomTom How Apple is Killing Standalone Platforms Message for you: A great standalone product is not sufficient. Wear Fitness

36. The giants of the Internet era resemble those of the Industrial era but for the opposite reason. © 2015 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com Source: Marshall Van Alstyne

37. 37© 2015 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com Giants of Demand Side Economies of scale Westinghouse Dynamo 1893 Ford Model T 1908 Carnegie Steel 1905 Vanderbilt Colossus of (Rail) Roads

38. 38© 2015 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com Giants of Demand Side Economies of scale Micro Blog Now Social Networks Now Windows OS 1990s-00s Matched Mkts Now

39. Monetizing Platforms Means Free Pricing is Profitable What changes :: Marketing & Prices © 2015 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com See ‘’Strategies for Two Sided Markets” (2006) Harvard Business Review Eisenmann, Parker & Van Alstyne

40. For work on antitrust regulation, market power & two-sided platforms Jean Tirole: Nobel Laureate in Economics 2015 © 2015 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com Nobel Prize in Economics 2014

42. If markets are independent, collect profits in both. Price Quantity Market One q1 p1 Price Quantity Market Two q2 p2 See "Two Sided Network Effects” (2006) Management Science, Parker & Van Alstyne

43. But if markets are coupled, discounting one builds demand in the other. Price Market One Quantity q1 p1 p1 q1 Price Market Two Quantity q2 p2 p2 q2 See "Two Sided Network Effects” (2006) Management Science, Parker & Van Alstyne

44. 44© 2015 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

45. Corporate valuation models that underestimate market expansion due to network effects fail to invest What Changes :: Finance © 2015 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com

46. © 2015 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com • Estimate global taxi market • Estimate market share • Est. risk adjusted cash flow • Consider proprietary methods, barriers to competition • Value: $5.9 Billion Aswath Damodaran: NYU Finance professor, Corporate Valuation author, Herb Simon Prize.

47. Bill Gurley: Venture Capitalist, OpenTable, Zillow, Uber © 2015 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com • All true but overlooking network effects. • Prices decline expanding to rental car market and car replacement market and delivery market. • Oh, BTW, already 3x size in 2009 when Uber started. • Value: $17 Billion Source: David Sacks, COO PayPal, CEO Yammer

48. Platforms Unlock New Value from Spare Resources and User Generated Content What Changes :: Supply Chains © 2015 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com

49. AirBnb sells users’ spare rooms, competing with hotels that must own them RelayRides sells users’ spare cars, competing with rental firms that must own them © 2015 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com

51. 51© 2015 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com 2005 2013© 2015 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com

52. ``In 2015, Uber, the world’s largest taxi company owns no vehicles, Facebook the world’s most popular media owner creates no content, Alibaba the most valuable retailer has no inventory, and Airbnb the world’s largest hotelier owns no real estate.’’ Tom Goodwin, Sr. VP of Strategy Havas Media © 2015 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com

53. Employees Must See Across the Platform, which Must Support a Shared Data Layer What Changes :: Internal Organization © 2015 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com

55. 56© 2015 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com © 2015 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com

56. 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 © 2015 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com Source: Yegge Rant

58. A platform is a system that can be… adapted to countless needs and niches that the platform’s original developers could not possibly have contemplated…” Mark Andreessen: Venture Capitalist, Netscape Founder, Board HP, eBay© 2015 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com Source: “The 3 kinds of Platform you Meet on the Internet” – Sept 16, 2007.

59. 60© 2015 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com It’s Working when Users do Something You Didn’t Expect Hay Carrier RacecarFlour Mill Ford Model T

60. 61© 2015 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com It’s Working when Users do Something You Didn’t Expect Snowmobile Goat Carrier Sawmill Mobile Church

61. 62© 2015 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com − Open to .com” Open to developers − The Rise & Ignominius Fall of MySpace – Business Week 2011 Does Openness Work?

62. 63© 2015 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com The Rise & Ignominius Fall of MySpace – Business Week 2011 ‘‘We tried to create every feature in the world and said, ‘O.K., we can do it, why should we let a third party do it?’ ‘’ says (MySpace cofounder) DeWolfe. ‘’We should have picked 5 to 10 key features that we totally focused on and let other people innovate on everything else.’’ Does Openness Work?

63. 64© 2015 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

64. 65© 2015 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 ValueAdded

65. Platforms will Displace Gatekeepers with Meritocratic Crowds What Changes :: Industry Bottlenecks © 2015 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com

67. Forget designers, product buyers, marketers. Threadless uses crowd to guarantee sales. © 2015 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com Advice from travelers replaces that of travel agents

68. Goal shifts from control, entry barriers, and differentiation to more valuable market exchanges. What Changes :: Strategy © 2015 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com

69. 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 5. Core competence: focus what you do best Porter’s Five Forces & Resource Based View © 2015 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com

70. Platform Strategy Differs © 2015 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com 1. Goal is transactions volume & creating customer value. Network effects provide sustainability

71. Platform Strategy Differs © 2015 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

72. Platform Strategy Differs © 2015 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.

73. Platform Strategy Differs © 2015 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com Owned / inimitable resources Profits increase when others add to platform’s Long Tail You don’t need to own this 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!

79. 80© 2015 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com If you believe in the power of people connecting, then embrace platforms. If you convert your product/service to a platform, what would it do, what community would it serve? © 2015 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com

80. THANK YOU QUESTIONS & DISCUSSION © 2015 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com marshall@mit.edu Twitter: @InfoEcon Find research HERE. Find blog posts HERE.