2 Platform-Mediated Networks Network User ANetwork User BPlatform Provider
3 DefinitionsTwo interacting principals, called network users, access—through one or more intermediaries called platform providers—a common platform that facilitates the users' exchange.Network effect: Evident when a network’s value to a user depends on the number of other users with whom they can interactA platform encompasses infrastructure (e.g., hardware, software, communications networks), standards that ensure compatibility between infrastructure elements, and rules (sometimes expressed in contracts) that specify transaction terms and the rights and responsibilities of network participants.
4 Example: eBay’s platform includes: Browser and Internet access (provided by 3rd parties)Registration processWebsite design (e.g., categories)Rules for biddingBid tracking softwareDispute resolution processesLinks to PayPal (a payment platform owned by eBay)Feedback systemMuch more
5 Platform Roles: Sponsors and Providers Platform providers facilitate network users’ access to platformPlatform sponsors do not deal directly with users; rather, they hold property rights that determine:Who may change the platform’s technologyWho may serve as providerPlatform sponsors often serve as platform providers, e.g., Apple Mac, Skype, eBay
6 Platform SponsorshipUnsponsored platforms evolve through the collective action of many partiesExamples: Internet, power gridSole versus joint sponsorshipSole sponsor examples: eBay, Skype, MacintoshJoint: multiple parties share sponsorship through joint ventures, consortia, or associations with procedures for securing agreement, e.g., IEEE sponsorship of ; Java Community; realtor association
7 Proprietary vs. Shared Platforms Proprietary platforms have a single provider -- often its sole sponsor (e.g., Skype, Monster.com)Shared platforms have multiple providersJointly sponsored platforms are often shared (e.g., DVD; VISA; real estate association)A sole platform sponsor may license rights to serve as provider to multiple parties (e.g., Scientific-Atlanta set-tops; MBNA American Express card)
8 Categorization Based on Extent of Mutuality ProprietarySharedUnsponsored(None, by definition)InternetGas-powered carsElectric power gridJointly SponsoredNYSECareerbuilderDVDs, VHSWi-FiUniversal Product CodeVISAJava, LinuxReal estate associationSole SponsoreBayMacintoshMonster.comSkypeFederal ExpressAdobe PDFScientific-Atlanta set-top boxAmerican Express card
9 We can categorize platforms based on: Extent of Mutuality: Sole vs. Joint Sponsorship; Proprietary vs. SharedFunction: Connectivity, Complements, MatchingStructure: One-, Two-, Three-Sided
10 Categorization Based on Platform Function Connectivity network: platform facilitates point-to-point exchange of information, physical goods, or passengers (e.g., fax; IM; Federal Express; railroads)More points connected more valuable network more points connected etc.Complement network: platform good is required to access variety of complements (e.g., console + games; credit card + merchant locations; fuel cell cars + refueling stations)More/better complements more users of platform good more/better complements etc.Matching network: platform helps match potential transaction partners (e.g., eBay; NYSE; nightclub; talent agent)More buyers more sellers improved odds of suitable transaction and/or reduced price volatility more buyers etc.
11 Categorization Based on Platform Structure “One-sided” networks: Most users regularly play both transaction roles, e.g., ers send and receive; stock traders buy and sell“Two-sided” networks: Most users are permanent members of one distinct group — a “side” — which transacts with a second group, e.g., gamers and developers; job seekers and recruitersCross-side network effects are usually positive (e.g., job seekers prefer more recruiters, and vice versa), but can be negative (e.g., TV ads)Same-side network effects can be positive (e.g., value from sharing DVDs with friends); negative (e.g., job seeker prefers fewer closely-matched rivals); or neutral (e.g., job seeker doesn’t care about seekers who are hunting for other types of jobs)“Three-sided” networks: Many media businesses facilitate interactions between viewers/readers, advertisers, and 3rd party content providers
12 Our domain does not necessarily encompass: Physical networks (e.g., gas utilities)Social networks (e.g., your golf buddies)“Ecosystems” comprised of large firms and their most committed suppliers and customers (e.g., Wal-Mart, Toyota)
13 Why study platform-mediated networks? Comprise a large and growing share of global economy. Not just computers/media/telecom/Internet, but also:Financial services, e.g., ATMs, credit cards, stock exchangesTransportation, e.g., package delivery, fuel cell carsRetail, e.g., shopping centers, bar codesEnergy, e.g., grid + appliances, wholesale power marketsHealth care, e.g., HMOsConfront distinctive management challenges
14 Distinctive Challenges Strategic decisions are very complicated due to:“Multi-sidedness” of most networksBifurcation of platform roles: sponsor and providerMixed motivations: cooperation, conflictConcepts are new: academic research on “two-sided” networks only began five years agoMistakes are common and can be fatalYahoo, Amazon failed in U.S. auctions; eBay failed in JapanCollusion by NASDAQ market makers led to $1 billion SEC fine and set stage for ECN competitionWith Macintosh, Apple “forfeited 20th Century’s biggest business opportunity”Priceline tried to extend “name-your-own-price” model to groceries, resulting in $360 million loss
15 Distinctive Challenges, cont’d Business Model DesignWinner-Take-All DynamicsPlatform Envelopment
16 Business Model Pop Quiz: Sexism Aside, Why Do Nightclubs Offer “Ladies’ Night” Pricing?
17 Which side should be charged in a two-sided network? Assume marginal cost = 0Case 1, with no network effect: monopolist prices each product to maximize P x QCase 2, with network effect, shows how demand for products “A” and “C” each would grow (vs. Case 1) if quantity consumed on the other side increased due to a zero priceSide C should be priced at zero if: ((P’A x Q’A) - (P*A x Q*A)) > (P*C x Q*C)Rule: Charge side that most highly values growth on the other sideNightclub pricing: “Men prefer quantity, women prefer quality”?!?
18 Winner-Take-All: Two Questions #1: Will a WTA outcome prevail, i.e., will almost all network users affiliate with a single platform?Strong network effects increase WTA oddsIf not, we will observe one of the following outcomes:Multi-homing: most users on a given side affiliate with multiple platforms, e.g., credit cards; media playersMono-homing: most users on a given side affiliate with only one of several competing platforms, e.g., video game consoles; online subscription music sites#2: If a single platform prevails, will it be proprietary to a single firm, or shared by multiple firms?
20 Credit Cards: Multi-Homing WTA Potential?PDF: WTACredit Cards: Multi-HomingMulti-Homing CostHigh for document producersLow for readersLow for both sides, i.e., card holders and merchantsUser Demand for Transaction Partner VarietyHigh for both sidesUser Demand for Differentiated Platform FunctionalityLow due to WYSIWYG; advanced functions can be provided selectivelyHigh: revolving vs. charge (i.e., pay-in-full with no preset limit)
21 If WTA, for Fighting vs. Sharing Compare Market Size x Market Share x Margin If Fighting:If Sharing:Market SizeFear of stranding delays adoptionMaximal network effectMarket Share100% or 0%!Depends on cost position, distribution, etc.MarginMonopoly pricingUpfront R&D, marketing costCompetition focused mostly on price?
22 Platform EnvelopmentPlatform providers in separate but adjacent networked markets (A and B) share usersProvider B enters A’s MarketProvider B bundles products A and B, undercutting provider A’s “money side”Side 1 (subsidy)Side 2 ($$)Platform APlatform B
23 Envelopment in Digital Music RealNetworks was dominant streaming media software provider in late 1990sPlayer was free to consumers; content providers were the “money side”Real Player was enveloped by Windows Media Player; WMP server software bundled into NTReal redeployed into Rhapsody subscription musicYahoo! enveloped Rhapsody, bundling Yahoo! Music with portalYahoo! Music is vulnerable to envelopment by AppleiPod is vulnerable to envelopment by Cingular
24 Other Envelopment Examples Internet Explorer vs. NetscapeCable- or IM-base VoIP vs. Skype, VonageNokia NGage vs. GameboyMedia Center PC vs. Scientific-AtlantaLinkedIn vs. Monster NetworkingDoCoMo FeliCa vs. credit cardsFuture? Microsoft Word vs. AcrobatFuture? IBM vs. AkamaiFuture? Google Office vs. Microsoft Office
25 Defensive StrategiesInnovate (e.g., Adobe moving from document presentation to document management)Cede and redeploy — preferably through platform envelopment! (e.g., RealNetworks move from streaming media to subscription media)Find a “big brother” (e.g., RealNetworks + Comcast, Cingular in response to envelopment threat from Yahoo et al. in subscription media)Sue (e.g., RealNetworks collects $760 million from Microsoft)