October 25, 2007

How can a Platform succeed in the long-run?

The rage in Silicon Valley today is all about platforms - platforms which are vying to become industry standards in their respective categories. Apple is pushing iPhone (cell phone applications) and iPod/iTunes (discovery, purchase and consumption of music and video). Google, Yahoo, Microsoft and AOL want their products (online advertising, maps, widgets/gadgets, etc) to become platforms in their respective categories. Facebook is hoping its social networking site to essentially become a communications platform on the Internet.

Here are three key criterion any company has to meet in order to make its product (platform) an industry standard:
  1. Solve a problem for users and players in your industry.
  2. Allow 3rd parties to easily build on top of your platform in order to continue innovation and expansion of the value the platform creates.
  3. Fairly share the created economic value with 3rd parties which are developing products on top of the platform and thus enhancing platform's value to its users - the most difficult of the three criterion to execute successfully.
The above rules apply for any industry, though you'll find more examples in the technology industry, where speed and scope of continuous innovations often rely on establishing common standards.

General Motor's failed experiment with its OnStar system to make it a standard platform in the automobile industry for a wireless system that can provide new communication capabilities to vehicles is an example where customers and industry players agreed with the value (criterion #1) but GM's competitors could not trust it on the third criterion.

Facebook has checked the boxes on all the three above criterion. Its ability to succeed on (3) is however still questionable because it's too early to judge how Facebook will balance the very fine line and the difficult task of profiting from its own innovations on its platform while letting 3rd parties have unfettered and equal footing access to the Facebook platform in the long run - the economic incentives for the two to happen simultaneously can clash very easily. Then, Facebook is operating in a space where it is competing with the ultimate industry platform, the Internet itself. No points for guessing the winner in that fight.

Similarly, Apple has failed thus far in playing win-win with content firms whose content it needs to sustain early success of its iPod/iTunes platform in the long run (3rd criterion).

MIT's Michael Cusumano, along with Annabelle Gawer, wrote The Elements of Platform Leadership in 2002, a book that I'd recommend folks to pick up given its relevance in the industry's current love affair with Facebook & Apple. The book provides lessons from Intel, Microsoft and Cisco - pioneers in their respective industries, which succeeded in establishing their platforms as industry standards.

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