Why Disruption Is All About Ecosystem Thinking

Businesses and platforms need ecosystems to encourage economic development

It is almost a decade now since Apple launched its App Store, created a new developer ecosystem and accidentally changed the way business gets done. I say accidentally because Apple was initially reluctant to open up its iPhone to third party developers. The decision to open up has gone down in some poorly written histories as a masterful strategic move but in fact it was the developer community itself that demanded the opportunity.

Since then we have had a swathe of books that talk about platform thinking and the platform economy. The missing ingredient in this new theory of business is ecosystem thinking.

A decent platform will motivate third parties to do business on its behalf. It will encourage these other companies to make risky investments in innovation. And it will stimulate a good deal of content that binds the ecosystem in one body of collectively created and curated intelligence. That’s what makes it an ecosystem.

Ecosystems are dynamic relationships that spur economic development. Their disruptive power is unbounded. They change an industry, a way of work, society at large and systems of commerce. My message to any company wanting to be a platform is how will you change at each of these levels? If you do not have this ambition, you will be undone by the company that does have.

Between them Apple and Google have probably created at least 7 million jobs (based on Gigaom’s 2014 study of apps in the EU and extrapolating Apple’s own calculations) and recently Alibaba, which claims already to have created 30 million jobs, announced the goal of creating 100 million jobs as it grows to the same size as the world’s 5th largest economy by 2036.

Many of the companies that are touted as platform pioneers do not have this power and influence. They get stuck at the what might be termed “API thinking”. Look at the literature on open banking and you will see the problem.

Bank-as-a-platform is framed as a series of APIs that let third parties interact with bank assets. But if you are to understand the really disruptive effect of platforms you need to understand ecosystems and how to motivate and manage them. You need ecosystem thinking and the absence of it in banking is what exposes most financial institutions to a slow death. Ecosystem thinking is that important.

The ecosystem represents all the new management thinking that goes into co-innovating with third parties and their assets. When you start to delve into it, you realise that ecosystem thinking is what challenges you to change your assumptions about management. The platform, in the end, is the technology behind relationship building.

There is a lazy route to half-understanding this – for example people talk about the network effects of platform businesses or two-sided markets. That takes you to a strategy around APIs, network effects and platform pricing models.

However, two of the major ecosystems today (Netflix and Airbnb) do not have open APIs and do not really trade on network effects. Sure they benefit from being on the network but this is a sine qua non. Without the network there would be no business. Moreover, their pricing models are simple. In Airbnb’s case it follows a typical SaaS model of charging roughly 30% for its services (cumulatively by charging both sides of the deal). Their platforms are about ecosystems.

Ecosystems not platforms

Uber and Airbnb are the companies most often cited as the poster-childs of the new platform thinking. Each of these is an interesting case study in something. But they are not necessarily platform companies in the sense that Apple or Google have defined this new form of business.

Uber has no ecosystem to speak of. Yes, it has millions of drivers using its mobile app. But there is little in the way of innovation that these drivers can attempt or little contribution that they make to a collective intelligence space that informs everyone on how to improve their business opportunities. In fact these drivers are often antagonistic towards Uber (not in itself a disqualification for being a good platform). But the sum, it might be said, is less than the parts.

Airbnb is a different proposition but it needs to be viewed through two lenses. It has ecosystem characteristics and managerially these differentiate it from say an Expedia or a Booking.com. However, it has not gone far enough with its ecosystem to build a defense against Booking.com copying its formula.

By explaining that perhaps I can give you some insight into ecosystem thinking. Airbnb began as a simple room booking app, similar to a site that was popular at the time, couchsurfing.com. The main innovation was to challenge couchsurfing’s non-profit offer with a for-profit mobile app. Somehow Airbnb had to rise above couchsurfing, an app that relied entirely on goodwill and relationship building, while inserting payments and profit into the human relationship behind house sharing. How it addressed that took it slowly into ecosystem thinking.

Defining ecosystem thinking

Ecosystems present a problem of definition. Very often people use the term when what they mean is community or group. But if the idea of the business ecosystem is to have any power it has to mean more than a community and more than an aggregation of economic activity. The Airbnb example can explain how additional elements make ecosystems distinct. I’ll give some more examples after this brief case study.

Over time, Airbnb has expanded into the sale of Experiences and into restaurant bookings. along the way has created the human assets that are essential in ecosystem thinking. These are, briefly:

  • Strong customer segmentation
  • Freely created content and collective intelligence
  • Independent business development around third party assets
  • Free long tail tools
  • Powerful adjacency moves

The diagram below show show Airbnb’s ecosystem has evolved. The companies in this ecosystem could in no way be described as a community.

Figure 1. The Airbnb Ecosystem

Haydn Airbnb

Strong customer segmentation

Airbnb has been appealing to a broader and broader segmentation over time. Initially it offered rooms, then whole apartments or houses. Natural segmentations existed in rural/urban and specific locations. The move into selling experiences allows it to refine this into a new kind of customer segmentation defined by customer interests (cooking, exercise, fitness, water-based, beach, mountain etc). As yet Airbnb seems to make very little of the data it must be compiling around interests but leaving that to one side it has wonderfully dynamic customer segmentation. It is now moving into upmarket condos in countries like Japan where it can offer the facilities you would expect on a long-haul vacation (swimming pool, gym etc).

Content and collective intelligence

Airbnb began with the typical platform content offer: reviews. This strategy has powered Amazon and many other companies and is an essential, though corruptible, element in trust building. But it has gone on from there to create travel and activity guides written by its Experience partners. It has access to the infinite travel guide to the world because it has members everywhere.

Third parties create conferences and workshops to promote good practice in the Airbnb ecosystem. These include seminars on property photography, how to advertise, maximising revenues (e.g. through cleaning fees), managing multiple properties, and using third party services.

Third party business development

That leads us to the range of businesses that now thrive in the Airbnb ecosystem but which are entirely independent of it. These include services like keyholding, guest reception management, cleaning services, photography and beautification, rental management software and dashboards, search engine optimisation, laundry pick-up, and management training.On top of that Airbnb has relationships with Telcos who preload its app on their phones and with construction and development companies that are looking to create accommodation that suits Airbnb’s new target markets.

Free long tail tools

Ecosystems have to be supported by free tools that take friction out of doing business on a platform. Google does this with Google analytics and trends. Airbnb provides accounting and management software tools to renters. In addition Airbnb is looking into the area of home improvement loans, taking it into the domain of financial services or offering up ways to use its data to de-risk loan decisions for partner banks.

Powerful adjacency moves

Finally, you see the scope for adjacency moves. Moving into travel experiences and restaurants are two interesting ones for Airbnb but the potential exists for a move into financial services and property development too.

Summary

In using Airbnb as an example I hope to have illustrated that an ecosystem is far more than a community or a group. It is a series of interdependencies that enable business development among people in the ecosystem. Often these people have no direct contractual relationship. They prosper by creating ecosystem elements that become integral to how the ecosystem functions. There is a natural form of pollination that takes place and business expands.

There are other examples we could have looked at. Alibaba and its Ant Financial and Alipay subsidiaries is one of my favourites but space is limited. Airbnb has changed the way people travel, is altering the way people view their physical space, is redefining how we vacation, and with more time will change the way cities are organised. It is also generating huge aggregate wealth for millions of people.

Alibaba is going much further than this, training people in rural China to become online businesses and creating huge numbers of jobs. In the process it is creating a global payments network to facilitate, initially Chinese travel but which will become in time an alternative global payments network for Chinese trade. These are the real disruptive networks effects of business ecosystems.

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