Is It The Platform Or Is It The Ecosystem?

Organisations should focus on the ecosystem, not the platform

It is exciting to see the release of a new book, ‘The Business of Platforms’ written by Gawer, Cusumano and Yoffie. The reason, very simply, is that Gawer and Cusumano are two of the original platform theorists. Their 2002 publication, Platform Leadership, gave an account of how companies like Microsoft and Intel managed their business platforms, not just dominating their industry but becoming part of the infrastructure of business.

The background

Gawer and Cusumano represent a tradition of late 1990s and early 2000s writing that documented the platform and business ecosystems of the early web era. Ianisti and Levien’s Keystone Advantage (on business ecosystems) and James F. Moore’s The Death of Competition are, equally, contributions that tend not to get enough airplay when people talk about platforms and ecosystems today. Each changed the narrative around western capitalist business.

In place of their attempts to understand this new enterprise form we’ve been somewhat sidetracked by the idea that platforms are all about two-sided markets (think Airbnb and Uber) and network effects. Actually, platforms and ecosystems are about so much more. They are about information and content, community, massive unintended but repeated consequences, changing work patterns, the significance of transactions engines, and of good software.

The argument

Gawer and Cusumano point out that of the 252 platforms they studied, only 43 succeeded. The failure rate, then, is just short of 80 per cent. This is an interesting statistic because it pretty much mirrors the failure rate of digital transformations. McKinsey points out that only 16 per cent of companies say their transformation ‘successfully improved performance and also equipped them to sustain changes in the long term’.

The transition to some kind of platform is inevitable for any company. Forget the usual idea that platforms are a ‘winner takes all’ business or that they rely on network effects. They are part of an overall restructuring of business. You have to get involved. Although there are outright winners now, this is far from the final structure of business. Right now, for example, we are seeing a challenge to Apple and Google’s App Stores, and iTunes looks likely to close. We have to understand that failure is an 80 per cent probability in any change programme.

In my view, the reason platforms fail is the same reason that digital and agile transformations fail. We’ll come onto that later.

Gawer et. al. divide platforms into two types: Innovation Platforms and Transaction Platforms. Other writers have emphasised two-sided markets and network effects. Drawing on their own research and the two-sided market argument, Gawer, Cusumano and Yoffie cite four reasons for failure.

(1) Mispricing on one side of the market: they argue that pricing is the most important strategic decision.

(2) Failure to develop trust with users and partners: they cite eBay in China, which seems to be a special case. Nobody trusted ecommerce in China until Alibaba decided to use escrow accounts, but using escrow has never become a generic strategy so not using it can hardly be cited as a failure point of platforms.

(3) Prematurely dismissing the competition: citing Internet Explorer, which is a weird choice given that it barely transacted.

(4) Entering too late: again, citing Microsoft and its inability to move its operating system into mobile – a strange choice, given that none of the US computer companies were prepared for mobile.

Interestingly, they also say in passing that Uber and Lyft have spent billions of dollars and may never draw a profit. There seems to be something they have overlooked there – trying to be global at pace costs too much money to justify the business. Although these companies are nominally successful, they should in fact be classed as failures.

Prepare to reframe platforms and ecosystems

In my view the platform and ecosystem landscape has been redrawn, and so must the analysis. Before describing it from a 2025 perspective, let’s look at some of today’s arguments.

Innovation platforms

Platforms enable other companies to develop new products, as per the Apple App Store. They share out the burden of innovation… But it’s not just that. One of the most important aspects of Amazon’s platform is its dependence on Alibaba for marketers who want to source products to sell on Amazon.com and Upwork for sourcing Amazon marketing skills. Ecosystems, in other words, often function at arms length from the platform and have no direct relationship with it. They don’t transact on it.

Transaction platforms

Are Uber and Airbnb quintessential transaction platforms? This idea comes from later entrants into platform thinking, coming from anti-trust analysis.The key here is that platforms control the transaction space in a market and represent a danger.

In contrast, I believe all platforms are first and foremost transaction engines, and their skill is to deal in micro-transactions, shifting the economy towards direct business-to-consumer activity in areas that were once intermediated. Uber is important because you don’t need taxi firms and taxi control centres. It attacks the culture of the taxi business.

Two-sided markets

I’ve already said it. Because we focus on the platform rather than the ecosystem we fail to see how extensive the ecosystem is. Airbnb is not a two-sided market. It is an extensive collection of new businesses – conferences and conference organisers, letting management services, cleaning companies, hosts, access managers and so on. It is an economy.

Network effects

Call it ‘sprinkle the magic dust’. Network effects are supposed to be what lets platforms scale, but what actually does this are situations like the $12bn poured into Uber; the presence of a parent company (the iPhone for the App Store); or uncontested markets such as extreme ease of user payments like SumUp. Network effects are a red herring and completely hide their little sister – the effect of being on a network – which we all have access to.

The reframe

For me we are oversold on platforms, which is a set of commodities (nonetheless, many aspirants don’t know how to use them). We are under-invested in understanding the ecosystem, which requires unique skills that are ill documented.

But first, what goes wrong in platforms?

  1. Companies continuing to exploit rent rather than exploring ecosystems (Microsoft’s continuing investment in Windows rather than Explorer, for example)
  2. Lack of software engineering skills and sequencing to develop new products and services around the platform, at pace
  3. Western ‘core competency’ philosophy – platforms and ecosystems thrive on adjacencies
  4. Poor executive vision that cramps investment
  5. No or low investment in content and advocacy to create belief in the new business opportunity because content and advocacy aren’t tangible assets
  6. Too much dependency on the API
  7. Lack of cooperation from the CFO, who cannot cope with changing business models or micropayments

This is pretty much what goes wrong in transformations, too. So what we are lacking is an understanding of how ecosystems function.

The key to ecosystems is understanding that they represent a whole new economy. Apple’s App Store succeeded in part because of the extensive advocacy for Apple at the launch of the iPhone. At the time, I worked inside Nokia, and we could barely get airtime for Nokia innovations in the face of all the content  that encircled an incumbent in a powerful industry like computing. It was only after a year or so that Apple understood it was creating opportunity for ‘the little guy’. It stumbled upon success with apps but its ecosystem was there long before Steve Jobs gave it the red light.

Ecosystems thrive on information and content. They also thrive when they create multiple avenues for new businesses, as per the Airbnb example above. Like anything, they need strong branding (or $12bn!) and that gives incumbents the advantage.They thrive when they breach the walls of an established industry, allowing entrepreneurial passion to pour in. In healthcare, GE tried to establish an ecosystem for breast cancer diagnostics but in reality it only let in established healthcare firms. It failed to break the industry structures down.

Look to the left, and Apple is dominating the discussion on what metrics can be used in wearables. The future of diagnostics lies with companies that have devices open to apps and content and therefore to the little guy. The avalanche will begin once lives are saved by wearables. Ecosystems thrive on signs of success.

And, finally, ecosystems are varied. They are more varied than platforms and they are not just marketplaces. Here is a picture of what the Alibaba ecosystem would look like translated into American business culture. This is an ecosystem, but not as we know it, Jim!

 

The Business of Platforms is available on Amazon.