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Home arrow Geography arrow The Internet as a Technology-Based Ecosystem: A New Approach to the Analysis of Business, Markets and Industries

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Platform Theory

This section will now look at a critical component of modern ecosystems which is the platform. In the modern ICT sector, an ecosystem will inevitably be anchored by a platform and platforms are now pervasive in high-technology industries (Gawer 2009; Downes and Nunes 2013). A platform exists when the elements of the ecosystem depend upon common standards and interfaces (Robertson and Ulrich 1998). Fransman (2010) also stated that symbiotic interactions were shaped by platforms. Gawer (2009) defined a platform as being a building block which could be a product, service or technology that acted as a foundation upon which other organisations could develop complementary products, services or technologies (Gawer 2010: 3-4). In an earlier work, Gawer and Cusumano (2008) referred to the emergence of modern high-tech platforms that were evolving systems made of interdependent pieces where each part could be innovated upon (Gawer and Cusumano 2008: 30).

Platforms usually emerge in the context of modular industries (Baldwin 2008) or industry ecosystems (Iansiti and Levien 2004). Therefore, Gawer and Cusumano’s (2008) belief that platforms were ‘core’ to a technological system (essential to its function) as well as being highly inter-dependent with other parts of the technological system, should not be overstated. Research has shown (Iansiti and Levien 2004; Eisenmann, Parker and Van Alstyne 2008, 2009) that the organisation of these ecosystems appears to follow a regular structure, with platform leaders acting as ‘keystone’ members of the network of firms (as discussed earlier in the chapter) who coordinate and orchestrate the platform complementors, with strong inter-dependencies (strategic and technological) between the “core” that is the platform and the other parts of the ecosystem (technological system). The complementors also occupy a peripheral position (Iansiti and Levien’s niche’ strategies) in the network with fewer links between them.

Technological platforms have become increasingly pervasive as new computing technologies have become embedded within industrial ecosystems transforming the industrial and competitive landscapes (Hitt et al. 2003) and disrupting the balance of power between firms. This trend has been referred as “The Age of the Platform” (Simon 2011; Downes and Nunes 2013).

Annabelle Gawer (2009: 44-77), developed a detailed typology of platforms which she broke down into four classifications, namely: internal platforms (within the firm), supply chain platforms (within a supply chain), industry platforms (industry ecosystems) and multi-sided markets or double-sided platforms. The chapter will now analyse these in more detail to determine their relevance to the ICT sector and ecosystem theory.

According to Gawer (2009: 46), the first widespread use of platforms occurred in the early 1990s within the context of product development. Gawer (2009: 46) referred to these as internal platforms otherwise known as “product platforms”. Meyer and Lehnerd (1997) defined product platforms as a set of sub-systems and interfaces that formed a common structure from within a stream of derivative products that were efficiently developed and produced. The benefits of designing and using product platforms were to reduce fixed costs, gain efficiency in product development (through the re-use of common parts), the ability to produce a large number of derivative products as well as gaining flexibility in product design and mass customisation.

Although most of the product platform literature was manufacturing based (i.e. automotive), most of the concepts and variables could also be applied to the context of services. The processes involved in the design of services could be broken down into parts that could then be assembled or integrated and later customised. However, Gawer’s (2009) internal (product development) platform is not an appropriate methodology or perspective when analysing the ICT ecosystem because all the activity takes place within the organisation and only involves a single firm. There is subsequently no external economic community with which the platform interacts to co-create and co-evolve new products (Moore 1993, 1996) and the platform configuration is linear (Afuah 2015) and silo-oriented.

Gawer’s (2009) second platform typology was the supply chain platform. According to Gawer, the supply chain platform extended the product platform concept to firms within the context of a supply chain. The main difference between the two platforms was that product design, development and manufacture happened externally and not internally, involving different suppliers and final assemblers. This often involved formal alliances and cross-ownership such as in the automotive industry where all the leading firms were in some form of partnership agreement. The objectives of the supply chain platforms were similar to the internal platforms in that they sought to improve efficiency, reduce costs, reduce the variety of parts and increase product variety (involving the systematic re-use of modular components).

However, the supply chain platform typology is also an inappropriate methodology or perspective for the analysis of the ICT ecosystem for a number of important reasons. First, there are frequently divergent incentives between the members of the supply chain or alliance and trade-offs often occur between optimizing the performance of sub-systems and optimizing the performance of the overall system. This is at odds with Moore’s (1993, 1996) definition of a business ecosystem where there is a shared vision between the members of economic community based on mutually supportive roles.

The members of the economic community should also co-evolve themselves and not just co-create products. Moreover, within these supply chain platforms, there is a clear hierarchy with the bargaining power resting with the final assembler. However, in the business ecosystem, coordination is through symbiotic inter-dependent relationships which add value. According to Fransman (2010), successful platforms actually shaped symbiotic relationships. Finally, supply chain platforms are industry-based and still conform to the principles ofPorter’s positioning school of strategy (1985). They are also linear and do not benefit from broader network effects (Choudary 2015) outside the supply chain silo.

Gawer’s (2009) third typology was the industry platform. A key distinction between supply chain platforms and industry platforms is that within industry platforms the firms developing complements don’t necessarily buy or sell from each other, they are also not part of the same supply chain nor is there any need for cross-ownership.

These platforms consist of a large number of firms that Gawer referred to as industrial ecosystems which develop complementary technologies, products and services. Examples include the Microsoft Windows, Apple iOS and Android operating systems, the Linux operating system, Intel and Qualcomm microprocessors, the Google Internet search engine, social networking sites such as Facebook, video game consoles (Sony, Microsoft and Nintendo) and more recently payment platforms. This range of platforms is increasing all the time as the cost of computing power, storage and bandwidth declines (Deloitte Centre for the Edge

2013) i.e. new financial technology (Fintech) and health platforms are also emerging.

Gawer’s ( 2009) industry platform typology, industry ecosystems, is well suited to the ICT ecosystem model. In fact, the first studies of industry platforms were based on computing, telecommunications and other information-technology-intensive industries. For example, in their study of the emergence of computer platforms, Breshnahan and Greenstein (1999) defined platforms as a bundle of standard components around which buyers and sellers coordinated their activities. West (2003) also defined a computer platform as an architecture of related standards which allowed modular substitution of complementary assets such as software and peripheral hardware. Iansiti and Levien’s (2004) “keystone firm” could also be compared to what Gawer and Cusumano (2002, 2008) called a platform leader i.e. a firm that drives industry-wide innovation for an evolving system of separately developed components. Meanwhile, Gawer and Henderson (2007) described a product as a platform when it was one component or subsystem of an evolving technological system i.e. when it was functionally dependent with most of the other components of the system.

As mentioned earlier, there are important differences between industry platforms and internal or supply chain platforms insofar as industry platform leaders (or platform owners) aim to leverage the innovative capabilities of external firms (which are not necessarily part of their supply chain) particularly where there is an “open” as opposed to a closed or semi-closed platform ecosystem (Eisenmann, Parker and Van Alstyne 2009). Platform leaders therefore strategically facilitate and stimulate complementary third party innovation through careful management of the ecosystem relationships (Gawer and Cusumano 2002; Iansiti and Levien 2004).

Gawer and Cusumano (2002) therefore proposed four levers designed to facilitate platform governance. The first lever was firm scope where the platform leader needed to decide which activities would be performed inhouse and which should be left for other firms to undertake i.e. should some complements be developed in-house? The second lever was technology design and intellectual property where the platform leader needed to decide what functionality or features they should include in the platform and whether the platform should be modular. The degree to which the platform interfaces would be open to outside complementors (and at what price) were also important decisions. The third lever concerned external

relationships with complementers. This is where the platform leader had to manage the complementors and to encourage them to make a contribution to the ecosystem. The fourth and final lever was concerned with internal organisation and how platform leaders should use their organisational structure and internal processes to facilitate and enhance the role of external complementors.

This approach is in stark contrast to Porter’s industry attractiveness, Five Forces model (1980) where the driving forces consist of bargaining power, barriers to entry and monopolistic power. The four governance levers can, therefore, be viewed as alternative coordination mechanisms that focus on achieving long-term Schumpeterian (1942) rents from innovation rather than short-term monopoly rents (Porter 1980, 1985) from monopolistic competition.

The fourth and final typology that Gawer (2009) considered was the double-sided (or multi-sided) market. The term, two-sided markets was coined by two French economists Jean Charles-Rochet and Jean Tirole (2003) following earlier research by William Baxter (1983). Double-sided markets (also known as two-sided markets, multi-sided markets or multisided platforms) are technologies, products or services that create value primarily by enabling direct interaction between two or more customers or participant groups.

Prominent examples of double-sided markets and the participants they connect include Alibaba.com, eBay, Taobao and Rakuten (buyers and sellers); Airbnb (dwelling owners and renters); the Uber app (professional drivers and passengers); Facebook (users, advertisers, third party game or content developers and affiliated third party sites); Apple’s iOS (application developers and users); Sony’s Playstation and Microsoft’s Xbox gaming consoles (game developers and users); American Express, Pay Pal and Square (merchants and consumers); shopping malls (retail stores and consumers); Fandango (cinemas and consumers) and Ticketmaster - venues and consumers (Evans and Schmalensee 2016).

Baldwin and Woodward’s (2009) research found common features between the architecture of multi-sided markets and the industry platforms (industry ecosystems). This is reinforced by the long list of examples of double-sided markets above. The similarities that Baldwin and Woodward (2009) identified were the existence ofindirect network affects (sometimes referred to as cross-side network effects) that arise between the two sides of the market when participants have to affiliate with the platform in order to be able to transact with one another.

However, Gawer (2009), was critical in her research when she stated that not all double-sided or multi-sided markets were industry platforms based on the earlier definitions in this chapter. Gawer (2009) indicated that these platforms were not always building blocks that acted as foundations upon which other firms could develop complementary products, technologies or services. She singled out those double-sided markets that were pure exchange or trading platforms (i.e. dating sites) where the role of the platform was purely to facilitate transactions between different sides of the markets without the possibility for other players to innovate and she, therefore, considered this typology to belong to a different category.

However, as the diffusion of smartphones, apps and cloud computing have increased exponentially since the publication of Gawer’s research (2009), the number of multi-sided platforms has proliferated (Evans and Gawer 2016). A key driver of this proliferation has been the business model innovation which has occurred in three ways: first, through de-linking assets from value; second, through re-intermediation and third, through market aggregation (Parker, Alstyne and Choudary 2016: 69-73).

Airbnb and Uber are good examples of how a multi-sided platform using a low-cost base de-links assets from value. These app-based platforms do not own real estate or automobiles (fixed assets) but through the use of their software infrastructures and network effects they are able to generate significant value for buyers and sellers by leveraging the under-utilised assets of third parties that would otherwise not yield any likely return i.e. the assets have little (if any additional value) without the complementary effects of the two-sided platforms (Parker et al. 2016). This is counter to the resource-based view (Grant 2016) where competitive advantage is achieved through the ownership and/or control of resources and capabilities that are valuable and distinctive and largely internal.

Further evidence of business model innovation on the part of two-sided markets occurs when an industry platform (industry ecosystem) disintermediates an existing supply chain such as travel agents. However, we are now seeing re-intermediation platforms emerge such as Skyscanner and Trip Advisor (Chaffey and Ellis-Chadwick 2012). These services are not only free but accessible 24/7 thereby enhancing the value proposition. In fact, multi-sided platforms have created a new layer of reputational information by leveraging social feedback relating to producers (Parker et al. 2016). Platforms such as Yelp, Angie’s List and Trip Advisor have created an entirely new industry based on certifying the quality of product and service providers.

The third form of business model innovation is market aggregation. Two-sided platforms create new efficiencies by aggregating unorganised markets (Parker et al. 2016). This is the process whereby the platforms provide centralised markets to serve widely distributed individuals and organisations. Market aggregation provides information and power to users who previously engaged in interactions in a haphazard fashion often without access to reliable or up-to-date market data and/or infrastructure. Platforms such as Upwork bring thousands of skilled professionals together making it easier for potential employers to evaluate, compare and hire them.

Both the industry platform (industry ecosystem) and the multi-sided market/platform typologies are appropriate for the analysis and evaluation of the ICT sector. Both of these platform typologies conform to Moore’s (1996: 26) definition of a business ecosystem. They both involve an economic community of suppliers, buyers, competitors and other stakeholders within the broader community. The community participants are also aligned with the directions of a “keystone” (Iansiti and Levien 2004) or platform leader (Gawer and Cusumano 2002) and there are shared visions relating to intended outcomes and value.

This is in contrast to the linear, single or one-sided businesses such as the internal (product development) and supply chain platforms (see Fig. 4.1). These theoretical approaches are not relevant to the ICT ecosystems.

In a one-sided market, the consumer is located at the end and value is pushed out to them. The functions of production and consumption are

The traditional one-sided business (Adapted from Choudary

Fig. 4.1 The traditional one-sided business (Adapted from Choudary: 2015) also clearly demarcated. One-sided firms also compete through resource ownership and control and scaling through vertical integration and mergers and acquisitions. With the platform ecosystem model, the value is enabled by the platform leaders and is co-created via a network of participants. Successful, modern ecosystem platforms create huge value not through their access to physical resources but through leveraging data to coordinate physical and digital resources across the ecosystem (Tiwana

2014).

 
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