appropriability, proximity, routines and innovation a ...

Paper to be presented at the DRUID Summer Conference 2007 on

APPROPRIABILITY, PROXIMITY, ROUTINES AND INNOVATION Copenhagen, CBS, Denmark, June 18 - 20, 2007

A STRATEGY TOOLKIT FOR PLATFORM LEADER WANNABES Annabelle Gawer Imperial College London [email protected] Michael Cusumano MIT Sloan School of Management [email protected]

Abstract: Today high-tech markets are battlegrounds for platform leadership. This article offers a comprehensive strategy toolkit for platform leader wannabes. It answers four questions : (1) How to decide whether to pursue a platform or a product strategy? (2) What steps to follow to become a platform leader? (3)What strategy should I follow if I want to dislodge an existing platform leader? (4) What strategy should I follow if I want to protect my position from platform competition? We introduce two strategic concepts: coring and tipping. Coring helps create and establish industry platforms, while tipping helps win platform battles.

JEL - codes: L22, L15, L14

A Strategy Toolkit for Platform-Leader Wannabes 4 June 2007

Annabelle Gawer and Michael A. Cusumano

A Strategy Toolkit for Platform-Leader Wannabes 4-Jun-07 1/33

I.

Introduction

In recent years, most hi-tech industries have become platform battlegrounds. Take, for example, digital media players for music and video (Apple versus Microsoft and Real), mobile smart phones and other handheld devices (Nokia-Symbian versus Palm, Microsoft, and Linux), video game consoles (Sony versus Microsoft and Nintendo), enterprise software (SAP versus IBM, Oracle, and Microsoft), online payment services (PayPal/eBay versus Sony, Microsoft, credit card companies, and others), and even “Web 2.0” social networking sites (Facebook vs. MySpace and others). Platforms are systems of technologies that combine core components with complementary products and services usually made by a variety of firms. Together, the platform leader and its complementors form an “ecosystem” for innovation that can greatly increase the value of the platform and its complements as more users adopt the platform. Even non-technology products, such as the Barbie doll, can become platforms for companies and their partners to sell a variety of complementary products and services.1 The reason why platforms have taken on such a key economic role is that platforms are engines of innovation. Platforms make us think very differently about the nature of products and services. Instead of narrowly limited products or services with predetermined uses, they become alive, fuelled by continuous innovation brought about by third-parties. Platforms have deeply restructured how industries operate. They have raised high expectations for firms attempting to achieve platform leadership as well as serious concerns for survival among firms being attacked by platform leader wannabes. Not surprisingly, there is now a growing body of research on how platform markets work. Nonetheless, many firms face strategic questions that existing research has failed to answer. It is not enough for managers to know the story of how Intel and Microsoft have toppled the dominance of IBM in personal computers – many still wonder how come so few firms have managed to repeat this achievement. In particular, many managers – in both high technology and non-technology businesses – are asking the following four questions: (1) (2) (3) (4)

How do I decide whether to pursue a platform or a product strategy? What concrete steps do I need to follow to become a platform leader? What strategy should I follow if I want to dislodge an existing platform leader? What strategy should I follow if I want to protect my position from platform competition?

This article builds on the existing literature on platforms we helped to initiate in our 2002 book Platform Leadership (HBS Press, 2002). In that study, we identified four levers (or categories of managerial decisions) to sustain platform leadership (see Sidebar 1). Other writers have subsequently focused on ecosystem dynamics. For example, M. 1

Christopher Palmeri, “Barbie Goes from Vinyl to Virtual,” Business Week, May 7, 2007, p. 68.


Iansiti and R. Levein analyzed the special role of “keystone” firms in providing common assets to promote the platform (“Strategy as Ecology”, HBR, March 2004). R. Adner focused on the risks brought about by interdependency within ecosystems (“Match Your Innovation Strategy to Your Innovation Ecosystem”, HBR, April 2006). D. Yoffie and M. Kwak argued that platform leaders need a combination of “software” and “hard” power to manage the complex relationships with complementors (“With Friends like These: The Art of Managing Complementors”, HBR, September 2006). In addition, economists such as Tirole, Rochet, Evans, Schmalensee, and Hagiu have characterized platforms as “double-sided markets”, identifying the link that platforms provide between two groups of users. Much of this work focuses on pricing strategies in platform markets. Eisenmann, Parker and Van Alstyne (“Strategies for Two-Sided Markets”, HBR, October 2006) also identified the strategy of “envelopment” when a platform “swallows” the network of users of another platform. General enthusiasm for platforms has run so high that in 2005 HBR published an article titled: “Every product’s a platform” (Sviokla and Paoni, 2005). To date, these contributions – though valuable – do not provide a complete platform strategy toolkit and leave too many issues open to question. For example, research on double-sided markets has focused almost exclusively on pricing dimensions. Its main argument is that platform leaders need to subsidize one group of users (e.g., software applications developers) to attract the other populations of users (e.g. end customers) to the platform. This is an important insight, but pricing strategies do not address fundamental problems such as the qualities that a product needs to become a platform and how to encourage a platform market and ecosystem to emerge. There are also common misunderstandings on what it takes to establish a successful platform. Many managers assume that identifying a core component should be enough. Others have thought it sufficient to manage relationships with complementors or to find the right pricing strategy to set off the dynamics of a platform market. There have been a few well-known examples, such as Intel and Microsoft, which have reinforced overly simplistic notions about what it takes to be a platform leader. This article brings together new insights into both successful and unsuccessful attempts to become platform leaders and provides a comprehensive set of strategies and choices for platform leader wannabes, whether they are new entrants to a market or established firms. By linking the business and the technology sides of platform competition, this article fills a significant gap in the literature, We have found from our research and discussions with many managers over the past ten years (most recently at firms such as Nokia, SAP, eBay, e-Frontier, NTT Data, and Siemens Automation) that successful platform strategies must simultaneously combine specific insights on platform design with specific methods on how to conduct a platform business. In this article, we argue that there are two fundamental strategies for wannabes to follow, either by themselves or in combination. One strategy, which we call “coring,” tackles the problem of how to create or establish a new platform where one has not existed before. Coring sets out to identify or design an element (which can be a technology, a product or a service) and make it “core” to a technological system as well as a market. The goal of coring is thereby to re-architect technological and business A Strategy Toolkit for Platform-Leader Wannabes 4-Jun-07 3/33

relationships to create a functional hierarchy in the power structure among firms. The second strategy, which we call “tipping,” helps managers build market momentum to win a platform battle. Tipping sets out to influence platform dynamics and needs to be deployed in the context of platforms competing between themselves.

The article is organized as follows. The first section answers Question (1) – how to decide whether to pursue a platform or a product strategy. The second section explains coring as an answer to Question (2) – how to create and establish a platform. The third section details tipping – how to build market momentum to win a platform battle. The fourth section tackles the last two issues: Question (3) – how to dislodge an existing platform leader; and Question (4) – how to protect one’s position from platform competition. The article concludes by providing a platform strategy toolkit which explains under which conditions a firm should use coring, tipping, or a combination of the two. The Four Levers of Platform Leadership (Sidebar 1) In our Platform Leadership book, we focused on how firms can drive industry innovation and “architect” or influence competition through four particular levers. The first lever we called firm scope: the choice of what activities to perform in-house vs. what to leave to other firms. In particular, this decision is about whether the platform leader should make at least some of its own complements in-house. The second lever deals with technology design and intellectual property: what functionality or features to include in the platform, whether the platform should be modular, and to what degree the platform interfaces should be open to outside complementors and at what price. The third lever covers external relationships with complementors: the process by which the platform leader manages complementors, and encourages them to contribute to a vibrant ecosystem. The fourth lever is internal organization: how and to what extent platform leaders should use their organizational structure and internal processes to give assurances to external complementors that they are genuinely working for the overall good of the ecosystem. This last lever often requires the platform leader to create a neutral group inside the company, with no direct profit-and-loss responsibility, as well as a Chinese Wall between the platform developers and other groups that are potentially competing with their own complementary products or services. Taken together, the Four Levers offer a template for sustaining a position of platform leadership. Our main example was Intel as provider of the microprocessor, a key element in the Windows-Intel personal computer platform. We also compared Intel to other established platform leaders: Microsoft with Windows, the key software component of the PC platform, and Cisco with the Internet router and internetworking operating system. In addition, we spent some time discussing the plight of several companies attempting to establish their products as new industrywide or international platforms: NTT DoCoMo with i-Mode and wireless cell phones that compete with a variety of alternative technologies around the world, Palm with its handheld computer that competes with other devices and operating systems made by Microsoft, the Symbian consortium, and Blackberry, and Linux vendors such as Red Hat, which offer an opensource operating system that completes with UNIX and Windows.


2. The Platform vs. Product Strategy Choice a. Not Every Product Can (or Should) Become a Platform In our view, there is one main difference between a product and an industry platform. A product is largely proprietary and under one firm’s control, whereas a platform is part of an industry-wide ecosystem. A true platform, therefore, is no longer under the full control of the platform owner, even if it contains some proprietary elements. While the benefits of becoming a platform are well-established, we want to make it clear that we do not believe that “every product can become a platform”. 2 Achieving platform status requires specific decisions that govern technology evolution, product and system design, and business relationships within the ecosystem. To stand a chance at success at platform leadership, which is relatively rare, there are a few pre-requisite conditions. So, how can we tell in advance whether a product, technology, or service, has the potential to become an industry-wide platform? We found that a product has platform potential if it satisfies the following three criteria: (1) It performs at least one essential function within what can be described as a “system of use,” or solves an essential problem for many actors in the industry. (2) It is easy to connect to or to build-upon, to expand the system of use as well as allow new, even unintended end-uses. (3) It is difficult to substitute for. A common mistake that managers make is to think that meeting one or two out of these three criteria can be sufficient. We found, however, that you need to meet all three criteria in order to have platform potential. Moreover, there are ways to test whether a product fulfills these conditions. For the first criterion, we recommend to test whether the overall system could function without the particular product, technology, or service. If the system cannot operate, then the product does indeed perform an essential function. For example, the Intel microprocessor and the Windows operating system are both platform components of the personal computer, which is itself a system that could not function with these essential components. For the second criterion, the challenge is to test whether a product or a technology is easy to connect to or to build-upon. A way to do this is to see whether external firms have indeed succeeded in developing complementary and interoperable products, or have at least started to do so. Finally, to test the third criterion, firms have to establish whether there exists a product, technology, or service that could fully replace the existing platform candidate.

2

We thus disagree with Sviokla, J. and Paoni (2005), “Every Product’s a Platform”, Harvard Business Review, October.


It is also important to make a choice early on between pursuing a product vs. a platform strategy because the industry conditions and choices that favor a platform business are different from those that favor a product business. This leads to fundamentally conflicting economic incentives between owners of platforms (which need some degree of “openness”) and integrators or assemblers of “closed” systems (or products).3 For example, owners of open platforms benefit from lots of innovation in complementary products as well as from lots of competition at the system level. They naturally tend to stress end-user benefits that stem from mixing-and-matching best-ofbreed combinations of other compatible components. In contrast, product or system assemblers are engaged in system-level competition, and benefit when customers perceive their systems as unique. Naturally, they usually want to downplay just how similar their product is from the competition (as external perception of common components with competing systems does not help them build up a perception of differentiation). Logically, system integrators or assemblers tend to promote the end-user benefits that stem from the smooth functioning of their product’s (or system’s) unique integral design, and from the seamless integration between (preferably proprietary) components. In contrast to platform owners, they do not benefit from heavy competition at the system level. So platform firms and product firms generally want to see different industry configurations. We believe this is a major reason why Dell has run into such problems recently with competition from firms such as Hewlett-Packard-Compaq and Lenovo, which have reduced costs and adopted aspects of Dell’s direct sales model. Dell has no unique component or platform technology to differentiate its products or make “Dell products” work better with each other. At the same time, two other “one-stop shop” producers, Microsoft and Cisco, have retained some system-level differentiation through their unique software platforms (Windows and IOS), although both have come under attack as internet-based component technologies have enabled smaller, specialized firms to compete with specific “point” products. Managers make other common mistakes when it comes to product versus platform strategies. Sometimes they are in a state of confusion (such as in the case of Palm with the PDA, which we shall detail in Section 4) as to whether they should pursue a product or a platform strategy. At other times they are oblivious to the platform potential of their product, such as in the well-known examples of Apple with the Macintosh (discussed 3

Whether a technology is “open” and “closed” is the result of two distinct behaviors: disclosure of intellectual property (IP), and governance of how the technology evolves. Firms who opt for open technologies tend to disclose at least some of their IP to other firms (usually IP for interfaces or connectors, i.e., of what it takes to interface with their technology), sometimes for a fee. Some organizations such as Open Source, at the most “open” end of the spectrum, design technology in an open governance format and fully disclose not only interfaces but also the innards of their technology, -- and for free. At the “closed” end of the spectrum, some firms don’t disclose anything and evolve their technology all by themselves. Somewhere in the middle of the open-closed spectrum, firms such as Apple keep full ownership of the process of design of their technology, but will disclose interface information to allow other firms to develop complements to interface with their technology.


below) or Sony’s Beta vs. JVC and Matsushita’s VHS in home video-cassette recording. In the latter example, Sony envisioned the main use of the VCR as playing home-made family videos and did not realize the importance of cultivating an ecosystem of partners in marketing and manufacturing or content (prerecorded tapes). In contrast, Matsushita and JVC from the start envisioned the use of watching pre-recorded tapes and established partnerships with movie studios and makers of video-cassettes as well as broadly licensed the technology to other manufacturers and distributors.4 We shall explore further in the last section of this article – the strategy toolkit – the conditions under which it may make sense for firms to deliberately pursue these two objectives (product and platform) simultaneously. But the question remains of how managers can choose wisely which way to go. We found that this choice should depend on several variables. Of course, the first condition should be that the product has platform potential – i.e., it meets all three of our platform criteria. Another variable is the nature of the product’s end-use. Here, the question is whether users would find utility in a variety of end-uses rather than in a limited set of functions. If there is strong end-user demand for variety in complementary products and services, then, in general, an open platform approach is useful to let other firms innovate on the platform to extend the range of enduses and grow the overall market. But this question of whether the platform owner firm would be better off letting third-parties innovate on top of the platform depends also on the nature of firm’s own capabilities (and, crucially, whether the firm is better at system integration or component production), as well as on third-parties’ capabilities and incentives. Also relevant to the choice of product versus platform strategy is the nature of competition (are there existing alternative platforms yet?) or threat of entry (is there is a credible threat of entry by platform wannabes?). We found in particular that there is one set of circumstances where firms would be better off not trying to transform their products into open platforms: when a firm’s main competence is system-integration and, at the same time, there is neither existing platform competition nor credible threat of entry by platform wannabes. In all other cases, we believe it is worthwhile attempting to devise a platform strategy. We now turn to develop the question of product vs. platform strategy in the case of Apple.

b. Platform vs. Product Strategy: Is Apple a Platform Wannabe? The story of Apple’s failure with its Macintosh vis-à-vis Microsoft in personal computers is well-known: if Apple had promoted the Mac OS as a core component of the PC and licensed it as broadly as Microsoft licensed MS-DOS and then Windows, then 90 percent of personal computer users today would probably be using a Mac. Apple also failed to make its early Newton PDA a successful new platform, and it failed to make its AppleTalk network technology an industry-wide platform.

4

See Cusumano, M., Y. Mylonadis, and R. S. Rosenbloom (1992), “Strategic Maneuvering and MassMarket Dynamics: The Triumph of VHS over Beta”, Business History Review 66, No. 1 (Spring).


More recently, one of the most successful innovations in consumer electronics is Apple’s iPod device, which stores and plays digital music, photos, and video. Apple announced in April 2007 that it had sold a total of 100 million iPods since the launch in November 2001, making it the fastest-selling music player in history.5 An ecosystem of firms has emerged producing thousands of iPod attachments, from iPod docks in hi-fi systems to automobile audio system connectors, alarm clocks, recorders, and a plethora of other accessories. Apple retains a lot of influence in this ecosystem, not only because it completely controls the interface connection standards to the iPod, but most importantly, because Apple established its own digital music service, iTunes.6 In fact, Apple designed the iPod so that it only plays music downloaded from the Apple service or from CDs. We can therefore think of Apple’s iPod as a “closed” platform. Now, facing entrants such as Microsoft in the digital music space, will Apple suffer the same fate that it did with personal computers and other products and services? We think a major reason for Apple’s difficulties in platform competition is that the company was historically focused on creating and controlling proprietary products, or closed platforms. True, Apple hopes these products become sufficiently popular to dominate an industry. Apple has not, however, followed deliberate platform strategies and nor has it tried to make its technologies open to the industry or to convince a majority of complementors that it can take on a leadership position, such as Intel and Microsoft have done with the PC. Part of the problem in the past, we think, is that Steve Jobs and other Apple managers – in contrast to Bill Gates of Microsoft or Andy Grove of Intel – have been less concerned with the difference between products and platforms, and their different economics, market dynamics, and strategic requirements. Apple’s ethos, exemplified by Steve Jobs, is to offer a superior, integrated user experience. Apple is a great products company. It has yet to demonstrate that it can or indeed wants to be a great platform company. But let’s delve deeper, and assess whether Apple’s strategy today is right, given its capabilities and the competition it faces. On the one hand, in hindsight, it is clear that Apple’s strategy (stick with products, ignore the platform) was faulty for the Macintosh. The wide-spread licensing of Microsoft OS and the cloning of the IBM PC created a huge market with lots of competition for IBM-compatible PCs, as well as provided innovation incentives for developers of Windows-compatible software. Third-party development of Windowscompatible software erected “software barriers to entry” in the PC market, and Microsoft became dominant in this market. Microsoft also developed a highly successful suite of applications with Office, which were complementary to Windows, resulting in a virtuous feedback loop stimulating demand for both new versions of its operating systems and of its applications. On the other hand, Apple’s strategy was justified on several accounts. First, contrary to Microsoft, which focused on software, Apple has always designed and commercialized 5

Source: http://www.apple.com/pr/library/2007/04/09ipod.html A standard refers to a technological format, and usually refers to an interface between two components or products. A platform may contain several standards interfaces, or connectors, that are surrounding a core element which is at the heart of several markets 6


hardware combined with software. Apple’s business model was (and remains) to make money from hardware that is unique both because of its design and its software. Apple, therefore, showed little interested in licensing its software. Further, another justification for keeping software and hardware integrated was to make the best possible computer and to improve the system’s capabilities without having to ensure that it would work on a variety of hardware configurations. A superior integrated experience has always been what Apple was striving for. As a result, Apple did not benefit from the kind of ecosystem dynamics that Microsoft did. There was no competition to drive down hardware (and software) prices and much less incentive for software companies to produce applications for the smaller Macintosh market. Will history repeat itself between Apple and Microsoft in the digital media industry? Will Apple lose out again, because it is offering a closed platform, if new entrants come in with an open platform? We don’t think so. First, Apple’s competence lies in creating new product categories, with innovatively designed, highly-integrated hardware and software. The company should not rush into open platform strategies unless competition forces this move. Second, even if Apple has again created a “closed” platform with the iTunes/iPod, this time market circumstances are different, and play in Apple’s advantage: competition and entry are not taking the shape of an openly licensed, software-only platform, and in fact, competition from Microsoft and other entrants with iPod lookalikes that do not function as well has not been successful so far. We also believe that Apple has learnt from its early mistakes and from the success of Microsoft. Apple understands now how to harness the power of platforms, and in particular the importance of complementary products and positive feedback loops. With its iTunes store, Apple has lined up the best content and has signed the most deals with music content providers. It also recently signed a deal to display videos from Google’s YouTube service. Building on iPod’s tremendous success, Apple has recently entered the mobile telecom space with iPhone, which adds e-mail, web browsing, and phone capabilities. Apple’s platform ambitions can in fact be traced back to 2000, when it began to develop service software such as iTunes, but also launched a series of hardware machines, with new Macintoshes, the iPod, and the Apple TV -- a wireless set-top box that wirelessly shares and accesses content, and is integrated with iTunes -- and soon the iPhone. The iTunes store, used by installed base of 100 million iPod users, will provide Apple TV users with secure access and commercialization of digital content, be it commercialized content, interactive or personal content, or independent content (such as indie films or videos). The combination of hardware and software is an ambitious effort by Apple to establish a platform in the digital space. Given the capabilities of Apple in this domain and the lack of true open platform in the competition, we are optimistic about Apple’s prospects. But what should Apple worry about now? While a proprietary platform approach seems fine for creating new markets and product categories, it may become vulnerable once a market takes off – if new uses become available or attractive to customers and the company is unable to provide those new capabilities. Another danger is imitation and commoditization – if other firms succeed in copying the essential features of the unique A Strategy Toolkit for Platform-Leader Wannabes 4-Jun-07 9/33

product and drive down prices. Therefore, Apple must remain on the frontier of product design and the user experience. 3. Coring: How to Create and Establish a Platform For companies that want to develop not only a great product but make their offering into a true industry platform -- our earlier Question (2) -- we recommend a coring strategy, which we shall now explain in more detail. We also want to use the examples of Google and Qualcomm as successful coring, General Motors OnStar and EMC as examples of failed coring, and the digital home and Web 2.0 social networking platforms as examples of coring in process. a. The Concept of Coring Previous research from the engineering literature on platforms has offered general, high-level prescriptions on the importance of modular design to facilitate ecosystem innovation. Other research, from management, has focused on the importance of coalition-building to attract complementors to develop complementary products that add value to the overall ecosystem – but has tended to be very vague about how this links with platform-specific technological guidelines. Our claim is that these two approaches (the technical and the business sides) have to work hand-in-hand for firms to create and establish a platform. Coring sets out to identify or design an element (which can be a technology, a product or a service), and make it “core” to a technological system as well as to a market. Coring thereby re-architects technological and business relationships to create a functional hierarchy within the system-of-use, as well as a power structure among firms. Functionally, an element or a component of a system is “core” when it resolves technical problems affecting a large proportion of other parts of the system or opens up the system to new usage possibilities. These different uses can be ultimately developed by a variety of third parties. Economically, the fact that an element is “core” should be reflected in a strong willingness-to-pay among customers for the platform. The business aspect of coring requires that the platform leader design economic incentives for ecosystem members to invest in creating complementary innovations. We found that both technical and business re-architecting have to be performed, otherwise coring will fail. An effort at coalition-building without a proper technological platform design will run out of steam, as we shall see in the automotive OnStar example from General Motors. Likewise, a good platform design without appropriate business incentives for complementors will fail, as we shall detail in the EMC data storage example. But first, let’s turn to how to “core” a market and explain how coring helps create and capture value for ecosystem participants.


b. How to “Core” a Market Choices about the design of the platform (not just its functionalities but how open its interfaces should be) are intimately related to the structuring of the business relationships among ecosystem members. We had indicated in our Four Levers (See Sidebar 1) that it was important to combine Lever 2 (which concerned technological choices), and Lever 3 (business relationships). We now sharpen these categories with a seven-step formula for platform wannabes to core a market. (1) Have a vision of how an alternative, platform-based architecture could supplant the current industry architecture (2) Design (or, if necessary, extract and “un-hide”) an element with platform potential (i.e., performing an essential function, easy to connect to, difficult to substitute) (3) Add connectors or interfaces so that other companies can build on the platform and share the intellectual property of these connectors (4) Identify third-party firms that could complete the platform for different types of finished, integrated products (possibly in different markets and for different uses) (5) Build a coalition: share the vision by evangelizing the technical architecture, but also by articulating a business model for different actors in the ecosystem, rally complementors, share risks, and facilitate complementary innovation (6) Keep innovating on the core, ensuring that it continues to provide an essential (and difficult to replace) function to the overall system (7) Gradually build up one’s reputation as a neutral industry broker, alongside with making long-term investments in industry coordination activities (whose fruits will create value for the whole ecosystem, including end users). A remark on Step 2: The fact that an element may provide “core” functionality does not necessarily imply that there is a broad market for it. In fact, in integrated architectures, components are hidden from end-users and there may be no outside demand. When that is the case, firms who want to succeed at market coring need therefore to “un-hide” the core component and create a market for it – precisely as Intel did with its famous “Intel Inside” campaign. Specifically for platform wannabes, we suggest a precise combination of the Four Levers to achieve market coring (See Sidebar 2). c. How Coring Helps Create and Capture Value For platform owners, coring creates value by a combination of cost reduction through scale economies and increased access to new markets. Platform producers can also capture value by the virtue of network effects: demand for platforms rise as sales of complements rise. Further, platform producers are to some extent protected from competition from other platforms by the virtue of “application barriers to entry” – in other words, the difficulty for entrants to replicate the provision of applications by the ecosystem complementors. Complementors create as well as capture value if they can take advantage of the network effects that will create more demand for their product. A Strategy Toolkit for Platform-Leader Wannabes 4-Jun-07 11/33

They will also benefit from lower development costs, brought about by their ability to connect to the platform. End-users who adopt platform-based products also create value for platform producers, complementors and other end-users by the virtue of network effects: the more adoption of the platform, the more creation of complements, and the more useful (and valuable) the platform. End-users also capture value when coring makes possible the creation of new products or new end-uses that were impossible to develop under the previous system architecture. Finally, competition within the ecosystem will tend to lower the prices of the platform and complements – which will create value which can be captured by end-users.

How Wannabes Should Use the Four Levers for Coring (Sidebar 2) ¾ Focus exclusively on the core element and interface connectors ¾ Avoid entering complementary markets ¾ Open Intellectual Property for connectors and interface technology ¾ Keep IP closed for core component’s internal technology ¾ Promote modular design for the overall system ¾ Try to be a neutral broker within the ecosystem

Lever 1: Firm Scope

Lever 2: Technology, Design, and Intellectual Property Choices

Lever 3: Relationships with External Firms Lever 4: Internal Organization and Processes

¾ Establish a Chinese Wall between groups that develop technologies which benefit the whole ecosystem and other business groups which may compete with other firms in the ecosystem

d. Examples of Successful Coring i. Google in Internet Search Google started off as a simple search engine company, and went on to create and establish its search product as a platform for navigating the Internet. Let’s verify first whether Google satisfied all three criteria of platform potential: (1) performs at least one essential function within the system, (2) easy to connect to or to build-upon, in part to allow different end-uses, and (3) difficult to substitute. As the Internet was this unchartered universe of information, Google brilliantly solved an essential technical A Strategy Toolkit for Platform-Leader Wannabes 4-Jun-07 12/33

problem, that of how to find anything in the maze of the Internet, with millions of web sites and documents online. Google’s search function provided therefore an essential function to use the Internet. Second, Google distributed its technology to web site developers and users as an embedded toolbar, making it easy to connect to and to develop upon. It also allowed different uses (such as combining search with different kinds of information or graphics) due to the inherently versatile nature of Internet search. Third, Google quickly proved to be the best search tool, which has kept substitutes at bay. But where Google really won the platform leadership battle for search on the Internet is by succeeding both in the technical as well as the business aspects of coring. From a business perspective, Google solved a fundamental problem, which was that in the early years there was a lot of confusion in the industry about just how to make money on the Internet. Google solved that essential business problem by linking focused advertising to user searches. In effect, Google revolutionized the advertising business by re-architecting the relationships between advertisers and Internet users. Today, Google’s market value is $145 billion, 8 times that of the largest advertising agencies such as WPP. Google had competition, and was not the first one to solve the technical aspect of coring (even if its technical solution was better). In the mid-1990s, Digital Equipment created a powerful search engine tool for the Internet, AltaVista; several other firms created equally powerful search engines, such as Inktomi and Yahoo!. But, they failed to create as much business for advertisers as Google had. We therefore contend that Google’s competitors failed in the business aspect of market coring. Google continues to core its market by appealing aggressively to developers to innovate on and extend the Google platform. For example, in June 2007, Google held its first developers’ conference, in front of 1000 developers, and 5,000 at 10 other locations around the world. The agenda included presentations on Google's Application Programming Interfaces (APIs) to enable developers to embed Google applications such as search, maps, calendars on websites, or to develop custom search engines. Google also presented APIs for the W2.0 social networking site YouTube, which it purchased in 2006. Google has also increased the amount of free online software it provides and is expanding its ambitions, -- since maintaining its market cap requires growth prospects that online advertising alone may not fulfill. Its ambitious vision is to provide to millions of users advertising-supported online software, moving from being a complementary platform to Microsoft, to become a direct competitor. Google has also indicated that it will provide free wireless internet access, -- a prospect that makes telecom industry players nervous. Concerns about Google’s enormous power and ambitions have started to rally competitors, which have started to claim that Google should not leverage its power to stifle competition, with Microsoft claiming that Google is suppressing competition in online ads, and suggesting that anti-trust authorities should get involved.7

7

Rob Holf, Ronald Grover, Peter Burrows and Tom Lowry, “Is Google Too Powerful?”, BusinessWeek Vol. 48, 9 April 2007.


ii. Qualcomm with Wireless Technology Qualcomm, founded in 1985, is another company that successfully established its technology as an industry platform through coring in the wireless communication market.8 Embedded into chipsets, Qualcomm technologies have quite literally cored the wireless phone market.9 Its technology consists of a set of proprietary telecommunication protocols, initially designed for satellites and military applications, that have become embedded in most “2G” (second-generation) and many 3G cell phones. Sales of chipsets and software accounted for 60% of its revenue, while most of the remaining sales came from licensing its intellectual property. 10 As of May 2007, Qualcomm chipsets were included in hundreds of different types of wireless devices. Around 1988, when telecommunications providers were beginning to introduce 2G digital cell phone networks, Qualcomm commercialized its CDMA (Code Division Multiple Access) technology. Meanwhile, European companies developed another technology, GSM (Global System for Mobile Communications). To start rallying business partners (the business side of coring), Qualcomm convinced the U.S. government not to support GSM and presented CDMA as an alternative. Japan had a different standard and China was developing yet another. These various technologies were incompatible, made inefficient use of the wireless spectrum, and offered poorer quality than CDMA, which breaks calls into small bits and then reassembles them much like the Internet does with data packets. Qualcomm exploited this gap in the market. In 1991, it successfully licensed the CDMA patents to AT&T (Lucent) and Motorola, and then to other firms in Europe and Korea. The CDMA standard grew to about 13 percent of the world market by 1999 but became the dominant platform in the U.S. Demand for a third generation technology of cell phone technology that could handle data as well as voice created another opening for platform competition. Qualcomm evolved its technology into CDMA2000, and introduced this in Korea during 2002-2003 with great success. Japan’s NTT DoCoMo, joined later by European firms such as Nokia and Ericsson, and combined GSM with some elements of CDMA to create a new WCDMA (Wideband CDMA) standard for their markets, though the conversion from GSM to WCDMA has been relatively time-consuming and expensive. According to Qualcomm, 3G subscribers totaled 460 million as of March 2007, with a market share of 75 percent for CDMA2000. WCDMA dominated only in Western Europe. CDMA-based handset shipments were also growing faster than total world shipments of handsets.11 With regard to other future, Qualcomm faces challenges not only to its patents from WCDMA providers, but it had to deal with 4G technologies such as WiMAX, which 8

This discussion of Qualcomm is based primarily on David Yoffie, Pai-Ling Yin, and Liz Kind, “Qualcomm, Inc. 2004,” Harvard Business School Case #N1-705-401 (January 25, 2005). 9 Qualcomm refers explicitly of its technology as “core”. Source: “Qualcomm Business Model: A Formula for Innovation and Choice”, http://www.qualcomm.com/about/pdf/QCOM_Business_Model_0307.pdf 10 Source: Qualcomm Annual Reports 2004, 2005. 11 Qualcomm, Inc., “Form 10-Q,” April 25, 2007, p. 18; and CDMA Development Group, “The Smart Money is On 3G,” August 2006, http://www.cdg.org/resources/white_papers/files/Migration.pdf


offered the potential to complement or replace CDMA technology. Qualcomm is attempting to pursue the same coring strategy for mobile broadband connectivity on laptops, with 70 models embedding Qualcomm chipsets as of May 2007. 12 Overall, Qualcomm still holds a strong platform position and benefited from it large and growing stream of license fees and royalty payments, which Nokia and other firms were continually trying to cut or eliminate. To lessen conflicts with Nokia, Ericsson, Motorola, and other customers, and to encourage them to adopt its platform technology, during 1999-2000 Qualcomm sold its cell phone handset and equipment businesses as well as its chip manufacturing operations, and decided to focus on licensing its technology to users of CDMA/CDMA2000 and WCDMA. This has proved to be a highly lucrative business strategy. In fiscal 2006, Qualcomm reported net income of $2.5 billion on sales of $7.5 billion. As of 2007, Qualcomm provided between 80 and 90 percent of CDMA and CDMA2000-based chips to world manufacturers of cell phones, cellular infrastructure equipment, and global positioning devices and equipment. Qualcomm also owned approximately 80 percent of the patents for CDMA and CDMA2000 technology (numbering more than 5000). It owned only 20 percent of the patents for the WCDMA standard, however. To some extent, Qualcomm resembled Microsoft and Intel in that its customers (in particular Nokia, the world’s largest handset manufacturer) did not like paying high royalties and was trying to move away from Qualcomm patents. In this sense, Qualcomm was perhaps not as successful as it could have been in the business side of coring – it might have shared more of the profits with its ecosystem partners. e. Examples of Failed Coring i. General Motors OnStar in Automotive Telematics In 1995 General Motors started an effort towards launching a cross-industry platform, OnStar, with the goal to give wireless capabilities to the automobile for navigation systems, directions, notifications of accidents, remote diagnostics, remote maintenance reminders, internet connectivity, remote opening of locked vehicles, and other services. GM established OnStar as a wholly owned subsidiary in collaboration with its EDS and Hughes Electronics divisions. Each of the founders brought a specific area of expertise to the enterprise: GM brought vehicle design and integration, as well as a powerful distribution network; EDS provided systems development, information management, and customer service technologies; and Hughes contributed communications and satellite technology as well as vehicle electronics. The technology platform consisted of hardware, software, and service agreements with a wireless provider. Initially, GM managed to get other automakers (Toyota/Lexus, Honda, Audi/Volkswagen, and Subaru) to adopt the OnStar technology platform. Gradually, however, other automakers concluded that these capabilities and, in particular, the 12

Source: Qualcomm Annual Report 2006


information on the customer that OnStar generated about driving habits, was too valuable to let a competing company control. Consequently, other firms have been building competing systems and stopped licensing the OnStar platform from GM. In retrospect, GM never found a way to position its new platform in a neutral way for the industry. It could have done this by spinning OnStar off as an independent company, as it did with both EDS and Hughes. (Note that Qualcomm made its wireless technology business more independent from competitors by selling its handset and chip businesses.) Or GM might have done what Intel did by creating the equivalent of a “Chinese wall” around its architecture labs, the core microprocessor business, and various chipset businesses that competed with Intel customers. GM therefore failed mainly at the business aspect of coring, with its inability to create a neutral platform environment. Nonetheless, OnStar is an attractive service offering for GM and, with internal transfer payments, generates a profit for the automaker.13 ii. EMC in data storage The EMC case is yet another example of how important it is to combine a successful technological coring with a successful business coring. EMC, a market leader in data storage technology, launched a strategy in the early 2000s that aimed to establish its hardware and software technology, known as Wide Sky, as the industry-wide platform. Wide Sky was a middleware software layer that made it possible to manage third-party hardware, and by doing so it solved an important technical industry problem that affected all IT customers: the efficient management of a growing assortment of heterogeneous information systems, which store more and more mission critical data. Like GM, we can say that EMC succeeded in the technological aspect of coring, but failed at the business side. The Wide Sky effort never gained industry support. EMC was unable to convince its competitors -- principally IBM, Hewlett-Packard, Hitachi, and Sun Microsystems -- to adopt the EMC proprietary technology. Non-EMC customers were also reluctant to adopt a proprietary standard. As an alternative, EMC’s competitors established a new openstandards platform controlled by their own organization, the SNIA (Storage Networking Industry Association). The number of firms and users supporting this open technology eventually forced EMC to abandon its platform-leadership effort and adopt the SNIA standards. 14 Adoption of the consortium’s SMI (Storage Management Initiative) specification (SMI-S) is on the rise since it has received the formal backing of most of the storage industry firms. However, this standard has not yet fulfilled the promise of enabling centralized management of heterogeneous systems. This coalition of firms has therefore succeeded at the business aspect of coring, but failed at reaching a technical solution that would really solve the industry’s main technological problem. The

13

This description of OnStar benefited from public information as well as an informal discussion with the president of OnStar, Chet Huber, at the MIT Sloan School on April 4, 2007, 14 See Jean-Claude J. Saghbini, “Standards in the Data Storage Industry: Emergence, Sustainability, and the Battle for Platform Leadership,” MIT System Design and Management Master’s Thesis, June 2005.


functionality provided by this industry coalition is still lagging behind the functionality that EMC could provide. f. Analysis of Coring in Process i. The Digital Home (Intel, Microsoft, and others) The digital home is a potentially huge market – estimated in 2005 to be worth as much as one trillion dollars worldwide by 2008-2012.15 Since the initiatives are making progress, albeit slowly, and some firms are emerging as leaders, we consider this market to be experiencing coring in process. The goal since the mid-1990s has been to connect entertainment devices (e.g., television, stereos and music players) and appliances (e.g. heating or air conditioning systems, refrigerators) with a home computer network. Families would be able to store photos, video clips, or music centrally, and retrieve and play them back from any room in the house. Consumers could use the web to turn on their air conditioning an hour before they arrived home. Moreover, appliance manufacturers would be able to detect maintenance problems or handle billing over the web. To further this vision, several companies in 1999 formed a group called the Internet Home Alliance, bringing together Sears, Panasonic (Matsushita), General Motors, Intel, and Cisco to deal with the various challenges, such as wiring homes with high-bandwidth Internet service or making wireless functionality available. The group now includes Microsoft, AT&T, Whirlpool, Hewlett Packard, and the National Association of Home Builders.16 Microsoft, Apple, Hewlett Packard, and Sony all have tried to place their computers, video game consoles, or software at the center of the digital home. Telecommunications and cable service providers such as AT&T and Comcast are also trying to make their set-top boxes the central hubs in the future digital home. There are many challenges that these firms face, however. One key problem is coordination in product design and standards because no one company makes all the devices or appliances that consumers use in the home. Another problem is the different product replacement cycles. Customers buy new audio and video equipment relatively frequently, but they may go decades before updating infrastructure systems for heating and air conditioning or durable goods like refrigerators. Companies also want to push their particular versions and visions of the technology, which has made interoperability a problem. Other challenges include dealing with digital rights management for audio and video content. The two firms that ultimately took control of the PC platform are once more vying for 15

“Science Fiction? - The Digital Home”, Special Report on The Digital Home, The Economist, London, September 3, 2005, Vol. 376, No. 8442, p. 68, http://proquest.umi.com/pqdweb?did=892731131&Fmt=3&clientId=5482&RQT=309&VName=PQD 16 See http://www.caba.org/iha/iha-list.html and Paul Thurrott, “Internet Home Alliance Integrates Its Way into US Homes,” Connected Home Magazine, November 7, 2001, http://www.connectedhomemag.com/Articles/Print.cfm?ArticleID=23133&Path=Networking


platform leadership in the digital home market and, again, their efforts are potentially complementary and likely to have the most success. Microsoft, in 2002, launched its Windows Media Center software, intended to make the Windows operating system perform the necessary digital home functions. Microsoft has continued to upgrade this software through the recent Vista edition of Windows.17 Though adoption of Windows Media Center has been extremely slow among consumers, the ubiquity of Windows suggests to us that Microsoft will someday play a dominant role in the digital home as this market evolves. In 2003, Intel also launched a new digital home business division and began marketing a bundle of microprocessors called Viiv, intended to be the core chips in new home PCs. As it did with the personal computer, Intel has put in place a series of initiatives to encourage the adoption of its microprocessors and networking standards among customers, partners, and software developers interested in home applications. Also in 2003, Intel co-founded the Digital Living Network Alliance to promote interoperable common standards for audio and video within a home network. This group, whose board of directors now consists of representatives from Intel as well as Microsoft, Sony, Phillips, Hewlett Packard, Matsushita-Panasonic, and Nokia, has grown to over 130 members.18 To succeed in this coring effort, Microsoft will have to continue refining and expanding its Windows software for digital home applications. Probably the key player, however, is Intel. Devices and appliances need to have the capability to connect to the internet and talk with each other as well as a central computer; if they do not, the digital home will never emerge. Intel or its competitors, such as Texas Instruments and AMD, will have to make much more progress in getting appliance and infrastructure system manufacturers to embed microprocessors and add internet connections to their products. ii. Social Networking (Facebook, MySpace, etc.) Social networking websites are a new type of communications platform. They make it possible for individual users or for-profit companies to communicate with other individuals or group by posting content (text, video, audio, blogs, and even advertisements for products and services) on a main site, using tools such as simple create-and-upload menus. The most prominent sites as of mid-2007 were MySpace (owned by News Corp., with 160 million registered users worldwide) and Facebook (with 24 million users, growing at 3% a week, and ranked as the sixth-most-trafficked US website). 19 These networking platforms have developed a loyal following, often with many of their users returning daily to check on what their friends are doing and posting. What started off as networking for teenagers or college students also has led to the emergence of broader and niche social networking and even some commercial and highly valuable applications.

17

“Science Fiction? - The Digital Home”, op. cit. “Intel and the Digital Home”, http://www.intel.com/standards/case/case_dh.htm (accessed May 24, 2007). 19 Stephen Shankland, “IBM to Give Birth to ‘Second Life’ Business Group,” CNET news.com, December 12, 2006, http://news.com.com/2100-1014_3-6143175.html 18


For example, another popular site is Google’s YouTube, the most prominent videoposting website. This allows individuals to post videos as well as provides a platform for big media to post content after signing deals with providers such as CBS, BBC, Universal Music Group, Sony Music Group, and the Warner Music Group. Another important platform, more in the domain of “virtual reality,” is Second Life, which had nearly 7 million users. IBM has been heavily investing to support this site, with approximately 1000 employees involved at some level as well as a new business unit devoted solely to virtual reality technologies and activities. The business model for social networking platforms is to offer advertising-based, free, and mostly user-generated content. Corporate brands and commercial artists have seized the opportunity to create a “presence” on these sites, which are heavily visited by potential buyers. However, promises have not all yet come to fruition. In 2007, MySpace called up an average of 32.5 billion unique page views per month, but only incurred $90 million in advertising sales – a disappointing result when compared to the $580 million it cost News Corp. to purchase it.20 Google also paid $1.65 billion for YouTube in 2006. While all these “Web 2.0” platforms encourage their users to contribute either with content or with complementary applications (called “widgets” in this context), platforms do differ in their approach to the degree of openness they encourage or tolerate. For example, MySpace strictly controls the features embedded in its site. In the spring of 2007, it blocked some third-party makers who sold ads on their small program, such as a popular photo sharing widget maker called Photobucket. This approach contrasts with Facebook, whose 23-year-old co-founder Mark Zuckerberg 21 announced in May 2007 before 750 developers that he aimed to make of Facebook “the first open social network platform.” Zuckerberg promised that Facebook would remain available for any company or developer that wishes to develop for it and claimed that until then, social network platforms were “closed”. He also announced that the company had signed 65 partners, including Microsoft and Amazon, to build and embed embedding customized features into Facebook. These features include Amazon’s “Book Review” application, which allows Facebook members to share their book reviews with people in their private network.22 The ubiquity of the Internet and the malleability of software make it is very easy to connect additional software to existing platforms, as well as to link these Web 2.0 platforms to other hardware and software platforms. The result is a constantly morphing landscape for this market category. For example, telecommunication companies are trying to offer customer access to social networking sites, with MySpace signing a deal with Cingular to put MySpace on cellular phones, and Verizon teaming up with Google’s YouTube. Apple TV will also provide access YouTube videos. 20

Ronald Grover , “Cold Cash from a Hot Site: Can MySpace Pull in Revenue Fast Enough for Rupert?”, BusinessWeek, Vol. 34, 9April 2007. 21 Mark Zuckerberg founded Facebook in 2004 with Harvard college friend Dustin Moskovitz. 22 See “Facebook Plans to Open Site to Outside “Widgets”, Kevin Allison, Financial Times, 26 May 2007, p. 19, and “Facebook Becomes Hub for Outside Software Makers”, Eric Auchard, Boston Globe, May 24, 2007.


As we explained earlier (and beyond the hype of “openness”), the issue of how much control one platform should exert on its complements is again at the heart of the issue. In the Web 2.0 platform case, “widgets” increase traffic and therefore add value to the main platform site. But they can also distract viewers’ attention away from the platform’s main advertising banners when the widgets incorporate their own advertising. The complements then create a form of competition for advertising revenues. Another example of complementors crossing the line to competition is when big media starts closing in to protect its rights and shuts down unauthorized use of its material on online video channels – witness Viacom suing Google’s YouTube for $1 billion for allowing users to unlawfully upload clips from its TV shows. Revenue-sharing arrangements will have to be found between network owners and widget makers, as well as between social networking sites and content broadcasters, which will reflect customers’ willingness to pay. There is no escaping that openness brings benefits of complementary innovation but also creates the possible pitfall of becoming vulnerable to a complementor who might attempt to tip the market in its favor, if the complement becomes more popular than the original platform. We think that the social networking platforms that best manage this delicate balance of openness – both to stimulate the development of compelling complementary applications as well as to provide ways to generate money – with some control over content will prove to be the most lasting and valuable. In particular, it appears to us that Facebook is doing coring exactly right by tackling both the technological and the business sides simultaneously. First, Facebook is offering a very good product. It also has facilitated development of complementary applications by sharing with developers a special language based on HTML. Moreover, Facebook understands the business aspect of coring, as it explicitly wants to encourage companies to build businesses catering to its user base. For example, Zuckerberg announced that independent developers can sell advertisements or incorporate tools for conducting online transactions and keep all the resulting revenue. By doing so, Facebook appears to be proactively trying to provide or at least protect business incentives for potential complementors.

4. Tipping: How to Build Market Momentum to Win Platform Battles a. The Concept of Tipping, and How to Tip a Market Creating and establishing new platforms through market coring is only part of the story. When facing competition with other platforms, wannabes need another set of behaviors and strategies to help a market move in the direction of their new platform. We call “tipping” the set of activities that a wannabe can use to shape market dynamics and win a platform war. Our concept of tipping builds on earlier insights economists developed in the case of standards wars, though we believe that tipping is a broader


phenomenon that includes strategies to influence demand and supply within and across particular markets.23 There are a number of ways to help a market tip. Key assets to win a platform war include control over an installed base, licensing intellectual property rights, strength in complements, brand equity, and manufacturing or delivery capability. These are all useful assets as long as market boundaries remain fixed. But market boundaries are not fixed anymore, as can be seen in the phenomenon of “convergence” in hi-tech products, where functions and uses of end-products expand over time through investments of the platform leader and complementors. For example, the personal computer has to a large extent converged with office equipment such as fax machines and telephones. Mobile phones have converged with personal digital assistants (PDAs) and portable music players as well as PCs and taken on some of the functions of video game consoles. Back-office enterprise software stacks have increasingly incorporated functions once limited to specialized products. In this context of convergence, we have observed in recent years that some platformleader wannabes have tried to tip across markets, as opposed to within them. They have entered new markets with the power of their existing platform. In particular, we have found that successful wannabes can leverage whatever existing market power they have to compete aggressively on price, or enter new markets by extending the end-uses of their platform. For a platform owner, to enter complementary markets is a powerful way to tip across markets. Monopolists have been accused of leveraging their monopoly power from one market to the next – in fact, Microsoft has been accused of doing just that. A novel tipping behavior which we have observed is to see competitors banding up together in a coalition, as a defense mechanism, to fight entry by a platform leader wannabe. This can be seen not only in the storage example set out above, but also in cellular telephony with Nokia ganging up with competitors to back up the Symbian operating system to build a viable alternative to Microsoft’s mobile operating system. Japanese, European, and Chinese telecommunications equipment producers and service providers have also banded together to oppose Qualcomm’s monopoly in CDMA technology. In addition to the assets noted above, we would add a series of other assets, which successful market tippers have used. These broadly fall into two strategic categories: (1) influencing the demand side, such as through pricing; and (2) influencing the supply side, through as through product design and production, or bundling of complementary features. Influencing Demand Platform leaders who foster fierce competition between complementors can lower those firms’ margins and lower the overall system price – which in turn increases demand 23

See Carl Shapiro and Hal Varian (1998), Information Rules, Harvard Business School Press.


for the platform. For example, Intel and Microsoft have “squeezed” the PC manufacturers, which has lowered the price of PCs and increased their demand. As with standards, platform leaders want to encourage fast market adoption. One trusted method has been predatory pricing. For example, “free but not free” in the case of the Navigator browser (Netscape gave away millions of copies for “trial use” or under terms asking users to pay but not requiring them to do so) or Internet Explorer (users did not pay for IE specifically, though they did pay for Windows), or Google with its search technology and other features (Google products and services are free to end users, but they have to view advertisements, which companies pay for). An important insight from the economists literature is that pricing can play a key role in attracting either consumers to adopt a platform or developers to invest in developing complementary applications specific to a platform. In particular, economists indicate that platforms can be understood as double-side markets, and that it may be necessary for platform owners to subsidize one side of the market in order to bring on the other, paying, side.24 Influencing Supply Platform leaders can influence market dynamics through volume commitment and signaling. For example, JVC and Matsushita used their volume commitment as an argument to convince developers of videotapes to adopt the VHS standard. Intel, when trying to convince motherboard makers to adopt their new interface PCI, committed to develop it themselves in large numbers. Bundling and convergence are other common strategies for market tipping. Examples include Microsoft pressing PC assemblers to offer pre-loaded Microsoft software (Windows and Internet Explorer, as well as Office), or “three-way convergence,” when broadband telecom operators provide television, telephone, and internet access services. In addition, unlike with standards, where aggressive licensing and control over intellectual property is essential, platform leaders have a wider array of options with respect to openness, which encourages the supply of complements. Some platforms, such as Linux, have opted for complete openness. But other platforms, such as Apple’s Macintosh or iPod, remained more proprietary and appear to us more like great products than industry-wide platforms. As we explained earlier (see Footnote 3), firms can choose to open or close their technology along two dimensions: disclosure and governance. The general rule is that firms that keep a closed governance format, i.e., full ownership of the process of design of their technology, tend to guarantee better system integration and performance, but will obviously benefit much less from contribution from external firms. As for disclosure of interface intellectual property, the general rule is that disclosure of connectors’ information facilitates complementary innovation -- but with the possible 24

A good summary of this research can be found in Eisenmann, Parker and Van Alstyne (“Strategies for Two-Sided Markets”, HBR, October 2006), with indications of how to decide which side of the market to subsidize.


pitfall of becoming vulnerable to a complementor who might attempt to tip the market in its favor, if its complement becomes more popular than the original platform. This is what Netscape attempted to do to Microsoft, and a problem that Web 2.0 platforms face as well, as we shall detail later. b. How Tipping Helps Create and Capture Value Platform owners can capture value from tipping in several ways. First, when they tip across markets, they may extend their monopoly power (and ability to generate scale economies and profits) into a new market. They may also bundle a complementary product with their main product and increase their market penetration. On the other side, incumbent firms who attempt to resist entry by a competing platform can preserve value by banding together to confront the platform wannabe. Complementors benefit from any form of tipping as their destiny is linked to the success of the platform owner. End-users can also benefit from bundling of products and services due to reduced prices or greater convenience. In addition, investment in platform and complementary innovation can stop if it is unclear which technology will win in a winner-take-all scenario. c. Examples of Successful Market Tipping i. Web operating systems (Linux vs. Unix and Windows) Linux, supported by the open-source movement as well as companies such as Red Hat and IBM, has managed to become the fastest growing operating system used on servers. Introduced first in 1991 and based largely on the Unix design, it gradually became a major challenger to Unix (whose main distributor has been Sun Microsystems) as well as Windows NT (from Microsoft) in the back office. The Linux interface made it difficult to use for the average consumer, and there remains a shortage of desktop applications. However, another key open source product, the Apache web server, became the “killer application” for IT departments that helped establish Linux as a server operating system. In contrast, Unix remained expensive and required costly proprietary hardware. Windows NT was cheaper than Unix but still more expensive than a nominally free product, although Intel adapted its microprocessors to run the Linux operating system, and this reduced hardware costs. From about 20 percent of the installed base for server software in 2005, Linux grew to about 50 percent of the server market in 2006, compared to only 3 percent of the desktop operating system market.25 Even Microsoft in 2007 signed an agreement with Novell to make sure that Windows interoperates with Linux in the future.

25

DM Review, “Industry Research: Linux vs. Windows – Is the Gap Narrowing?” http://www.dmreview.com/article_sub.cfm?articleId=1030321 May 24, 2005; and Wikipedia, “Comparison of Windows and Linux” www.wikipedia.com (accessed May 29, 2007).


ii. Internet Browsers (Internet Explorer vs. Netscape Navigator) An earlier, equally famous case of an alternative platform or core product technology emerging to challenge an incumbent leader – the dominant Windows platform, once again – is that of Netscape and its Navigator browser, introduced in 1994. Sun Microsystems, Oracle, IBM, and many other firms and users supported the idea of using the web, rather than Windows, to launch applications. The Navigator browser initially was really a complementary product because it worked along with Windows. But Netscape designed its browser to work on all desktop operating systems, including the Unix and the Macintosh, and later Linux. As a result, users had more alternatives to access the web and web-based applications than simply relying on Windows-based computers and Windows-compatible applications on the desktop. Rather quickly, however, Microsoft responded by designing its own browser technology, Internet Explorer, and bundling this “for free” with Windows from 1995. This was an explicit tipping strategy. As hundreds of millions of new PCs shipped with Internet Explorer over the next several years, and as Microsoft steadily improved its browser technology, Netscape’s browser dropped from around an 80 percent market share to a negligible presence in the market, though some of the Navigator code lives on in an increasingly popular open source browser, Mozilla. d. Examples of Failed Market Tipping i.

Netscape

Even though AOL bought Netscape for what amounted to more than $10 billion in 1999 – generating enormous value for Netscape’s investors – we can also view this internet startup as an example of failed market tipping. Most people believe that Netscape could never have won the browser battle in the long run because of Microsoft’s ability to bundle Internet Explorer with Windows as well as its greater resources to invest in browser development. However, there are cases, such as Intuit’s Quicken vs. Money in personal finance software, Windows CE/Mobile vs. Symbian, or MSN vs. Google in internet search, where Microsoft was not able to transfer its dominant position on the desktop to new markets. Had Netscape not made several strategic and technical errors, it is possible that the company could have maintained Navigator’s lead and prevented the market from tipping toward Microsoft. For example, it took too long for Netscape to shift to a different business model. It continued to charge companies such as Dell and AOL as well as corporate users for the Navigator browser even after Microsoft began shipping a competitive version of Internet Explorer for free. Netscape failed to see that it could give away the browser and still generate enormous advertising revenues from its highly popular website. But perhaps Netscape’s greatest mistake was to challenge Microsoft too directly and present the browser as an alternative computing platform before it had enough of a user base and ecosystem of complementors (web site designers and web application developers as well as Internet service providers and PC assemblers who were licensing Navigator) to sustain A Strategy Toolkit for Platform-Leader Wannabes 4-Jun-07 24/33

its position.26 Netscape thus failed to maintain its early lead (at one time, more than 80 percent of the nascent browser market) and prevent tipping toward the Microsoft platform. ii.

Palm with Handheld Computers

After a resounding success in 1996-1999 as the pioneer of personal digital assistants (PDAs) with its Palm Pilot, Palm tried to do two things at once: succeed both as a product and as a platform. Not only did it try to establish its Palm device as the preeminent PDA, but it also promoted the Palm OS as an industry platform and tried to license it to PDA competitors. As we have seen in other cases, platform leader wannabes generally have difficulty if they do not establish a position of neutrality. Competing with potential partners is usually not successful. Palm also has suffered from the fact that the PDA market is quickly being absorbed by the “smart phone” market; overall demand for PDAs has dwindled. Palm is optimized around PDA functions, whereas smart phones that use other operating systems and devices are designed to serve more like handheld computers or telephones or both Consequently, Palm had great difficulty competing with the Nokia-backed Symbian operating system for smart phones and also Microsoft’s Windows CE and Mobile OS. We believe that if Palm had earlier separated its platform business from its hardware business (as Qualcomm did), it might have been more successful. Palm did end up splitting its operations into two companies in 2003, creating palmOne for the PDA devices and PalmSource for the OS, but this was too late for the market. PalmSource became increasingly dependent on palmOne as its main customer, and its 2005 operating loss amounted to $10 million on revenues of $72 million. In 2005, PalmSource was finally sold to a Japanese-based software company, Access and gave up the Palm name, thereby diminishing the confusion between Palm as product and Palm as platform. Access continues to market the Palm OS but with limited success. e. Analysis of Tipping in Progress i. “Triple Play” Digital Convergence (Voice, Video, and Data) A market that has yet to tip toward one technology is that of the digital convergence “triple play” – the bundling of voice (telephone), video (TV programming), and data (internet) services. The development of the internet broadband infrastructure as well as new technologies have made it possible for individual providers of these services to combine two or more of them as well as reduce prices, sometimes dramatically. For example, AT&T and other telecommunications firms now offer not only telephone services but also internet access and television programming through the internet (IPTV) and partnerships with satellite TV companies. Comcast now offers not only cable TV but also internet access and telephone services over its own cable network and the internet. 26

Michael Cusumano and David Yoffie (1998), Competing on Internet Time: Lessons from Netscape and Its Battle with Microsoft, Free Press.


We also now have satellite TV companies entering the market with internet services, with telephony over the internet probably soon to follow. Each of the players in these domains is starting from a different point but trying to tip across markets that historically have come with different technology platforms. Which platform, (and therefore which particular form of tipping) will win in this market? It may well be that multiple platforms continue to co-exist around the world, although we think that firms that have made the heaviest and earliest infrastructure investments in digital systems (which can handle voice, video and data as well as common billing of these services) may end up with the strongest market positions. For example, in the United States, cable TV providers would seem to have an advantage because they have been investing in high speed digital connections to individual homes throughout the country. According to the cable industry association, at the start of 2007, virtually all U.S. households had access to cable TV systems and high-speed broadband through the cable network. Nearly 60 percent of households subscribed to some cable TV service (66 million households). In addition, 34 million households were digital cable subscribers, 29 million had broadband data service, and 11 million (as of March 2007) had cable-based telephony service. However, 32 million households subscribed to a noncable video program distribution27 – indicating that clearly there is fierce competition for video programming. The other intriguing platform is satellite TV, which can reach anywhere and does not need cable lines. Users need to install a prominent external receiving dish, although they usually get this for free or near free. Satellite TV vendors have been gaining video customers because they offer regular TV programming, like the cable companies, but usually have more channels, slightly lower charges, and better quality service in terms of reliability as well as more high-definition programming.28 In countries where cable TV infrastructures are not so common, such as in China or India, satellite TV may well have a long-term advantage, particularly since it can more easily offer content from around the world. Telephone companies such as AT&T are also players in the triple play competition, and even the “quadruple play” when we add cell phone service. Some regional operating companies also have been aggressively upgrading their infrastructures to bring fiber-optic based residential home connections for internet broadband and IPTV service. Telephone companies thus can make video content available to their internet customers. But they often have to resort to partnerships and appear to have less access to television programming content compared to cable TV or satellite TV companies, whose primarily business is the selling of video content.

27

National Cable and Telecommunications Association, “Statistics” http://www.ncta.com/ContentView.aspx?contentId=54 (accessed May 26, 2007) 28 Brian Stevens, “Satellite TV vs. Cable TV – Which is Best?”, August 17, 2005, http://ezinearticles.com/?Satellite-TV-vs.-Cable-TV----Which-is-Best?&id=61179


ii. Video Games (Sony, Nintendo, Microsoft ) The videogame ecosystem generated $12.5 billion in sales in 2006, including games and consoles.29 The main console makers are Sony, Nintendo, and Microsoft. Every five or six years, new generations of consoles appear, triggering a new series of investments and competition in video games, sometimes developed internally by the console makers and sometimes developed by third-party developers. Every round is an opportunity for console players to tip the market to their advantage, but also presents the risk of being completely defeated. Earlier players, once successful, like Sega, have now practically vanished. Sony won the last round, attaining 70% market share with its PlayStation 2. Although some of the games run on all the different consoles as well as personal computers, the game consoles are actually very distinct platforms and represent very different platform strategies. In particular, the three main players are each trying to tip the market through different approaches. Microsoft, the newest player in consoles, has approached this market much as it has the PC market. It has tried to rally the largest possible number of software developers. It has developed a highly modular software architecture based on Windows programming interfaces (which are familiar to millions of PC developers), and has eagerly disseminated Windows-like programming tools to facilitate software game development. 30 Microsoft is also strong in online gaming capabilities and has designed its console to work seamlessly with PCs. So far, however, Microsoft loses money on each console it sells, and hopes eventually to make a profit on the software. Nintendo, the loser in the last round of console wars, has followed the strategy of selling the cheapest console while developing in-house or through a tightly controlled network of developers a smaller number of games but potentially bigger hits, such as SuperMario. Its consoles share a lot of technology with previous generations, making new games cheaper to develop. Nintendo also has surprised the industry with a clever innovation combining hardware and software that changes the player’s experience: a wireless remote control for its new Wii console that allows for a more intuitive gaming and appears to be attracting new users interested in exercising and sports such as golf and boxing. As of mid-2007, the Wii was outselling the competing consoles by a large margin.31 Sony latest console, the PlayStation 3 (PS3), is the most expensive. It contains high performance hardware and appeals to hard core players. The problem, according to industry analysts, is that Sony did not facilitate developers’ complementary innovation enough, as it has proven difficult to create games for the PS3. Sony has recently attempted to change this, realizing that it needed to work harder at facilitating developers’ ability to develop compatible games. For example, it has released more development 29

“Console Wars – Video Games”, The Economist, 24 March 2007. Matt Adkisson, Victor Costan, Yaser Khan, Davy Kim, and Lev Popov, “The 7th Console War”, MIT Sloan School, Software Business Class (15.358) Group Project, December 2006. 31 “Wii Fans Give Nintendo a Boost,” Boston Globe, May 29, 2007, p. C4. 30


tools and made them freely available to licensed PlayStation developers, earlier than usual in the console life-cycle.32 Will only one winner emerge, and crush the other two? We don’t think so. Here is why. Demand for video games is varied, and growing. There is room for more than one player. There are network effects that tend to lock customers and developers into one of the three incompatible ecosystems, but no one player seems to be vastly superior to the others, either in terms of hardware or software or the overall ecosystem – at least, not yet. This is why we do not believe that one winner will emerge in the foreseeable future. There is also room for different niche strategies. For example, Sony has target the highend, while Microsoft has targeted online gaming, a growing category. It seems to us that, in this industry, two things drive demand: particularly successful games (“hit games”), which Microsoft so far has not been able to develop; and tight integration between hardware and software, which Microsoft’s modular approach cannot optimize. We therefore think that Microsoft may achieve a respectable market share but not dominate its competitors. Nintendo, with its history of innovation around hit games and the user experience, combined with its broad appeal games and lower console price (about $200 less than rivals), offers a strong proposition for the mass-market gamers and casual users, and should allow Nintendo to expand its market share. Sony, the undisputed leader of the last round, seems to have taken steps to facilitate complementors’ software development for this round. Its strength in the installed base justifies an approach that stresses backwards compatibility. Each firm seems therefore to play to its strength, and, as the demand is segmented and growing, we think that all three firms will do well. Perhaps the “wild card” in this market is how the personal computer evolves and how many games become available for this more general-purpose computing platform. Hard-core gamers, which may be the “lead users” in this market, often prefer to buy “souped up” PCs with fast graphics and video cards, and extra memory. If the market eventually merges with the PC, then we expect Microsoft to have an advantage as the number of potential game developers, and potential hits, could rise dramatically if Windows becomes a more common programming environment.

5. The Platform Strategy Toolkit We can now summarize our insights and construct a toolkit for platform-leader wannabes that tackles the four questions laid out at the outset of this article. Our recommendations are summarized in Exhibits 1 and 2. First, we recommend that in all cases firms should first assess whether their product, service, or technology has platform potential (see Section 2). Then, what to do next depends on the nature of end-user demand (would end-users prefer specialized products 32

“Console Wars – Video Games”, The Economist, op. cit.


or a variety of applications) as well as on the extent of the firm’s capabilities (specialist or system integrator). Also relevant are competition or threat of entry (i.e., whether there is a credible threat of entry by platform wannabes) as well as the availability of external firms’ capabilities for complementary innovation. All these factors constitute different conditions under which wannabes might apply a combination of coring and tipping.

Exhibit 1: Strategy Toolkit for Platform Leader Wannabes Target industry Has no dominant platform Has a dominant platform

Coring Attack system-based competition with platform Specialist • Microsoft component• Intel maker • Qualcomm

Entrant’s capability

System assembler or integrator

Do Not Try a Platform Strategy Stay with a product strategy and remain a closed system

Coring + Tipping Build an alternative coalition and articulate business models for alternative ecosystem followers to rally opponents to existing platform, and/or firms that were left out in the previous platform ecosystem business model • Linux • Google

Product Strategy + Tipping. Start with a proprietary system/device, then bring on complements • Apple iPod, iTV, iPhone • Video Games, with, Sony and Nintendo fighting Microsoft

Second, we recommend that wannabes try to core their market using our seven-step formula. But if the platform wannabe wishes to enter an industry that has no pre-existing A Strategy Toolkit for Platform-Leader Wannabes 4-Jun-07 29/33

platform (see Exhibit 1, Column 1), then what to do should depend on the wannabe’s core capability: If it is a specialist component-maker, we recommend the wannabe pursue a coring strategy. If, in contrast, its core capability is system integration, we recommend it stay away from a platform strategy and pursue a product strategy instead. Exhibit 2: How to Protect one’s Position from Platform Entrants If attacked by external platforms

Firm’s capability

Ally with Competitors Component- But it will be very hard to resist maker envelopment if you are attacked by a monopolist from an adjacent market

Dual Strategies: Product and Platform System integrator

• •

SAP/NetWeaver Nokia/ Symbian

Third, to dislodge an incumbent platform leader (see Exhibit 1, Column 2), firms should still do market coring, with the caveat that they need to propose an alternative platform to the one already in place. We also suggest they complement coring with tipping. Here again, we find that business re-architecting has to go had-in-hand with technical re-architecting. If a wannabe directly opposes an existing platform, it must identify and rally firms who should have an interest in undermining the existing platform. In the case of entrants that are not system integrators but component or specialist makers, we suggest a combination of coring and tipping while building an alternative coalition and articulating business models for alternative ecosystem followers. This is what the Linux community and vendors such as Red Hat, as well as Google with search technology have done. In the case of new entrants who assemble complement products or who are system integrators but enter an industry with an existing platform, it may not be necessary to start with a coring strategy. It may be sufficient to enter with a really good product to tip the market. However, if rivals continue to enter, we suggest encouraging developers of complements and pursue coring as well. This is what we believe Apple can do with the iPod and the new iPhone. Microsoft has also followed this approach with its X-Box video game console, which challenged the incumbent leaders (Sony and Nintendo).


Fourth, to protect a firms from new platform threats, we need again to distinguish whether the firm under attack is a focused component provider or a system integrator. If the firm a component maker (and this can be software, hardware, or a service), then we agree with Eisenmann, Parker and Van Alstyne that it is particularly vulnerable to “envelopment”. This is when an entering platform bundles the specific component as part of a larger platform. We agree with their suggestion that allying with a “bigger brother” or changing one’s business model (change the “paying side”) are good strategies. When the attacked firm is a system integrator, however, we think the platform leader can attempt to play two games at once: pursue both a product (or system) and a platform strategy. We have seen firms such as SAP and Nokia attempt this counterintuitive dual strategy. As we have explained earlier, the economic logic of systems-based competition runs contrary to what helps a new technology or platform win. In recent years, however, we have seen a few incumbent assemblers, concerned that they cannot block an external coring (or platform entry) in their own industry, try to offer an alternative platform themselves. Nokia embraced a dual strategy in the cell-phone industry, attempting to fence off Microsoft’s entry by backing the creation of a new operating system, Symbian. WCDMA, also backed heavily by Nokia, is a response to Qualcomm’s dominance in CDMA technology. This is as well what the enterprise software maker, SAP, did when it created a middleware software platform, NetWeaver that can connect SAP’s applications to competitors’ applications. These two incumbent product or system firms have become platform wannabes in new markets. Nokia used to be a pure assembler of cell-phones. But when it saw Microsoft aggressively enter the cell phone industry with its operating system, Windows CE/Mobile – a market coring strategy on Microsoft’s part – Nokia realized it could very well become the next victim of Microsoft’s entry, akin to what IBM had experienced in the late 1980s. Nokia management also did not want to go the way of other PC manufacturers, who, like IBM, cede most of the value in their products to Microsoft’s and Intel’s core technologies in the Win-tel platform. Nokia’s retaliation move consisted in sustaining an alternative platform by backing up Symbian’s operating system, investing $250 million in 2004 into Symbian’s consortium to now owning nearly 50 percent of the venture. The Symbian OS also powers phones developed by Nokia’s competitors, putting Nokia in a position to pursue a dual strategy: maintain the uniqueness of its integrated mobile phones, while pushing the operating system component in competitors’ phones. SAP, the German software maker and world leader in enterprise applications, has traditionally developed products for enterprise resource planning, supply chain management, and customer relationship management. In general, system integrators such as Accenture, IBM, and hundreds of smaller firms implemented and deployed SAP software for their customers. In a departure from its previous strategy of offering integrated solutions, in 2003, SAP started to offer NetWeaver as a “business process platform” that included pre-defined enterprise services and integration technology. SAP wanted to create an ecosystem of independent software vendors (ISVs) that would develop applications on top of the SAP NetWeaver platform. Management believed that A Strategy Toolkit for Platform-Leader Wannabes 4-Jun-07 31/33

this platform would also allow customers to modify and reconfigure the building blocks of their SAP systems as well as allow better interoperability of SAP products with nonSAP products. SAP, however, did not intend to abandon its legacy applications business to become a pure platform vendor. This means that SAP has continued to sell applications, in competition with the same ISVs it hoped would develop applications using the SAP platform. Dual strategies are very difficult to implement because the firms must play two different games at the same time and follow two opposing logics: that of the system assembler and the platform leader. The challenge lies in that what helps platforms win does not help assemblers make money. We think these strategies are appropriate for threatened firms hedging their bets and preparing themselves for a transition towards a coring strategy. We should also warn of possible anti-trust consequences of such strategies. For example, over the years, Microsoft has often played an ambiguous game of openness and closedness – touting the openness of its application programming interfaces but at the same time highlighting the benefits of seamless integration of features across its applications. It has entered many complementary markets and has been accused of extending and leveraging its monopoly power by doing so. It can be tempting for firms that have achieved strong platform-leader positions to attempt to enter complementary markets and compete in systems – in effect, to pursue these two objectives (product and platform) at once. This strategy can make sense if they have the capabilities to develop the complements as well as system-integration capabilities because they can exert more control both over the platform and its technologies as well as complements. Managers can also justify this strategy as an attempt to hedge one’s bets in the face of uncertainty, as firms cannot always know in advance which path would yield them most growth or most profit. Fundamentally, however, dual strategies are very risky. If a platform owner has some market power in its first market, it becomes easy to squeeze profit margins from its complementors’ innovations simply by bundling the complements with the platform. Competing with one’s complementors too aggressively will eventually ruin a platform owner’s reputation for neutrality, weaken complementors’ incentives to innovate, and possibly encourage complementors to flee to a competing platform.33 Microsoft has been accused of doing just that in its landmark antitrust lawsuit, initially brought about by disgruntled competitors and complementors. Monopolistic platform owners thus need to worry about being sued for anti-trust violations. Aggressive efforts at market tipping often come too close to violating antitrust law. Intel and Cisco have also come under antitrust investigation.

33

See Annabelle Gawer and Rebecca Henderson, “Platform Owner Entry and Innovation in Complementary Markets: Evidence from Intel”, Journal of Economics and Management Strategy, Vol. 16, No. 1, pp. 1-34.


6. Final Thoughts Coring as an option is possible for small and large firms alike. But it requires a transformative vision, the ability to innovate rapidly, and skills at coalition-building. Small wannabes are not disadvantaged vis-à-vis powerful incumbents when attempting to provide conceptual leadership that inspires confidence and encourages complementary investments. Wannabes who are short on cash might not be able to provide the direct financial incentives that some powerful firms can distribute across over the industry to encourage complementary innovation. But, the upside is that new entrants are less likely to appear threatening to potential complementors as they are less likely to be able to squeeze complementors’ profits. While small firms can do coring, they will have a harder time at market tipping on their own. It is difficult for new-entrant firms to break into a market when facing a strong established platform leader or powerful component makers. We have reported here that more and more firms have started to band up together and build coalitions to try to fend off powerful opponents. On the other hand, established firms that have some degree of market power can leverage it to enter new markets and platforms can act as a further catalyst. However, there are regulatory dimensions and these firms need to be cautious of not provoking the competition authorities. Platform-leader wannabes need to have a broad vision and evangelize a business model that works for them as well as for potential members of the ecosystem. It can sometimes be very hard to do this, for example, when the industry is undergoing transition and its contours are ill-defined yield. However, these are the very conditions under which visionary leadership can yield the most spectacular results – precisely because it is so badly needed. In the face of uncertainty, such as when there are competing and incompatible standards, customers either wait to buy or stop buying, investors stop investing, and complementors refrain from developing their products and services.. In today’s hi-tech markets, where ongoing technological convergence blurs industry boundaries, and when many industry actors are struggling to figure out how to make money, there is a particular role to play for platform leader wannabes who can offer a compelling vision of how a technology and the business around it should be architected and how they could both evolve. Platform-leader wannabes can achieve such leadership by committing to and communicating, a vision of a system architecture that clarifies relationships between different components of the ecosystem, by evangelizing mutually consistent business models across the ecosystem, by coordinating and facilitating innovation on their platform, and helping to commercialize complementors’ products in the ecosystem. By understanding and applying the technological and business insights we have attempted to lay out in this article, wannabes can become successful platform leaders and help create value for all participants in the ecosystem.
