Model #3 – Platforms and Ecosystems

Part Three of a Five-Part Series

The past few weeks we’ve been discussing business model innovation – a topic many of you have asked about. The first two posts covered Accelerators and Incubators (here) and Premium, Personalized, and Service-focused models (here).

Today we look at Model #3 – Platforms and Ecosystems.

Platforms create value by enabling direct interactions between producers and consumers. Platforms differ from traditional ‘pipeline’ businesses in their networked vs. linear structure. For example, Apple’s handset business is a pipeline. But combined with the App Store marketplace (that connects app developers and iPhone owners), it’s a platform.

Companies can be both pipelines and platforms, but platforms usually win in the competitive marketplace. Pipeline giants such as Walmart, Nike, John Deere, and GE are all incorporating platforms into their models for this reason.

Ecosystems are dynamic, multi-company systems that bring together capabilities to create new products and services; companies such as Alphabet, Amazon, Apple, Facebook, Microsoft, Alibaba, and Tencent are examples.

Platforms all have an ecosystem. Typically, they are composed of four types of players:

  1. Owners control intellectual property and governance. 
  2. Providers server as the platforms’ interface with user.
  3. Producers create their offerings, and
  4. Consumers use those offerings.

Players can create and derive value from any position — owning the platform is not right for every company. CEOs need to decide how their company will operate within the ecosystem.

Why would you pursue this model?

This model is suitable if expanding your network is a strategic goal. For instance, Apple’s goal in 2007 was to connect participants in two-sided markets—app developers on one side and app users on the other—generating value for both groups. But this connection ended up yielding even more.

As the number of participants on each side grew, the value increased—a phenomenon called the network effect, which is central to platform strategy. By January 2015 the company’s App Store offered 1.4 million apps and had cumulatively generated $25 billion for developers.

The network effect is the chief value and it is powerful. Data exchange and customer insights afford further value in terms of ongoing product development.

How does it work?

Platforms involve key decisions about where you want to position yourself and who will have access. While pipelines have walls, platforms must be at least somewhat open to maximize value creation. Executives must make smart choices about access (whom to let onto the platform) and governance (what consumers, producers, providers, and even competitors are allowed to do there).

These choices aren’t fixed. Platforms often launch with a fairly closed architecture and governance and then open up as they introduce new types of interactions and sources of value. But every platform must allow producers and consumers to interact and share to some degree. Effective governance will inspire outsiders to bring valuable intellectual property to the platform, as Zynga did in bringing FarmVille to Facebook. You need to let go of exploitation fears for this to happen.

Bottom line

This model is all about marketplace connections and the network effect. To make this model work, you need to decide:

  1. Your position. Though platform/ecosystem ownership may seem like the best position, it isn’t necessarily. For instance, glassmaker Corning has gained investment from Apple for joint R&D projects. Corning is not the ecosystem owner but succeeds as a producer.
  2. Your rules about architecture and governance. You want enough openness to maximize positive network effects, but with some qualifiers. For example, Airbnb and Uber rate and insure hosts and drivers, Twitter and Facebook provide users with tools to prevent stalking, and Apple’s App Store and the Google Play store both filter out low-quality applications.

For more insight: Download our new briefing report 5 Business Models for Sustainable Growth (here) and keep following this blog series which builds on the report. We welcome your questions/challenges anytime; will either reply personally or address in future blog posts. Email me at cperkins@innovationedge.com or give me a call at 920-205-3297. 

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