3b. Monetizing Network Effects and Openness

Question 1

The challenge of monetizing network effects

Answer 1

Any charge levied on users is likely to discourage them from participating on the platform

Meeting the monetisation challenge must begin with an analysis of the value created on the platform

Question 2

Models of partially free pricing

Answer 2

E.g. cheap printer but expensive toner

The freemium model: a free layer of service attracts users who eventually pay for an enhanced version (e.g., Dropbox)

Free or subsidized pricing: Free or subsidized pricing to one user base and full price for another user base (the platform needs to make sure that the value given comes back in a greater amount)

A platform often creates more value than it can capture and thereby users can enjoy the benefits of the free value

Question 3

The value that the platform creates for users fall into four categories (also called sources of excess value):

Answer 3

For consumers: Access to value created on the platform

For producers or third-party providers: Access to a community or market

For both consumers and producers: Access to tools and services that facilitate interaction

For both consumers and producers: Access to curation mechanisms that enhance the quality of interactions

Question 4

Why are numbers not enough when finding the value of network effects?

Answer 4

Measuring numbers do not necessarily capture the value. The interactions facilitated must generate a significant amount of excess value that can be captured by the platform without producing a negative impact on network effects

In some cases, the ability to monetise a platform may actually increase dramatically when the number of users declines – reflecting the power of negative network effects to impact the value of a platform (e.g., Meetup on p. 113 – quality over quantity)

Question 5

Ways to monetize (1): Charging a transaction fee

Answer 5

Platforms that facilitate monetary transactions can monetise the value created by charging a transaction fee, which may be calculated as either a percentage of the transaction price or a fixed fee per transaction

Of course, if the fee is excessive, it may discourage transactions. However, they are not discouraged from signing up

Challenge: Buyers and sellers who find each other on the platform are naturally incentivised to take the interaction off the platform if they can

Platforms like Airbnb solve this problem by temporarily preventing participants from connecting (p. 116). Giving all information needed before connecting.

Service provider platforms that want to capture and monetise interactions must create tools and services that benefit both parties by removing friction, mitigate risk, and otherwise facilitate interactions

Question 6

Four forms of excess value created by platforms

Answer 6

o Access to value creation
o Access to the market
o Access to tools
o Curation

Question 7

Ways to monetize (2) Charging for access

Answer 7

It is possible to monetise a platform by charging producers for access to a community of users who have joined the platform not in order to interact with producers but for other, unrelated reasons

Charging third-party producers for community access is effective if the newly added contents enhance the value of the platform to its users

Question 8

Ways to monetize (3) Charging for enhanced access

Answer 8

This refers to the provision of tools that enable a producer/consumer to stand out above the crowd and be noticed on a two-sided platform, despite an abundance of rival producers and the resulting intense competition to attract consumer attention (e.g., LinkedIn Premium)

The system of monetising enhanced access generally does not harm network effects, since all producers and consumers are permitted to participate in the platform on an open, non-enhanced basis

If done wrong, it can increase the noise level on the platform and decrease the relevance of content for the consumers, leading to negative network effects. Effective curation must be in place still.

Question 9

Ways to monetize (4) Charging for enhanced curation

Answer 9

Consumers may be willing to pay for access to guaranteed quality – in other words, enhanced curation (e.g., with the babysitter platform p. 122, which has a subscription fee instead on an transaction fee)

Question 10

Whom should you charge?

Answer 10

Charging all users: Charging all users would, in most cases, discourage participation, thereby reducing or destroying network effects. However, in a few cases charging all users enhances network effects (e.g., high membership dues as guarantee of high membership quality)

Charging one side will subsidizing another: This works when the users from category A highly value the opportunity to make contact with users from category B (e.g., men and women in clubs)

Charging most users full price and subsidizing stars: Malls offer attractive lease terms to popular large retailers like Target, court celebrity teachers etc. p. 124).

Charing some users full price will subsidising users who are price-sensitive: Maybe students or elderly? P. 124

Question 11

From free to fee

Answer 11

If possible, avoid charging for value that users previously received for free

Also, avoid reducing access to value that users have become accustomed to receiving

Instead, when transitioning from free to fee, strive to create new additional value that justifies the charge

Consider potential monetisation strategies when making your initial platform design choices

Question 12

Openness definition

Answer 12

“A platform is open to the extent that (1) no restrictions are placed on participation in its development, commercialization, or use or (2) any restrictions - for example, requirements to conform with technical standards or pay licensing fees - are reasonable and non-discriminatory, that is, they are applied uniformly to all potential platform participants”

Being closed is not simply a matter of absolutely forbidding outside participants on the platform. It may also involve creating such onerous participation rules that would-be users are discouraged or charging such excessive fees (or rents) that the profit margins of potential participants are reduced below sustainable levels.

Question 13

Challenge of openness

Answer 13

The more open a system becomes, the more fragmented it becomes. An open system is also more difficult for its creator to monetize, and the intellectual property that defines it is more difficult to control. Yet openness also encourages innovation

Question 14

Openness and platform ecosystem

Answer 14

Given the basic design, it’s axiomatic that a vibrant and healthy platform is dependent on the value created by partners who are outside of the platform itself. If a platform is too closed, then partners cannot or will not contribute the value required to make mutually rewarding exchanges possible

Question 15

Three kinds of openness decisions

Answer 15

o Decisions regarding manager and sponsor participation
o Decisions regarding developer participation
o Decisions regarding user participation

Question 16

Manager and sponsor participation

Answer 16

Manager: directly touches users. Organises and controls producer/consumer interactions

Sponsor: retains legal control over the technology. control the overall architecture of the platform, the intellectual property that underlies the platform (such as software code that control its operations), and the allocation of other rights

Question 17

Manager and sponsor participation: four models (variant patterns of openness)

Answer 17

The proprietary model: A single firm both manages and sponsors the platform (greatest control = most closed)

The licensing model: A group of firms manage the platform, and one sponsors it (open and closed)

The joint venture model: A single firm manages the platform, and a group sponsor it (open and closed)

The shared model: A group of firms manage the platform, and other groups sponsor it (least control = most open)

More people = more agreement = inefficient management system. However, more open

Question 18

Developer participation: Three kinds of developers

Answer 18

Core developers: Core developers create the core platform function that provide value to platform participants. They are responsible for basic platform capabilities, designing, fine-tuning, maintaining and improving the system

Extension developers: Add features and value to the platform and enhance its functionality. They are normally outside parties, not employed by the platform management firm, who find ways to extract a portion of the value they create and thereby profit from the benefits they offer

Data aggregators: enhance the matching function of the platform by adding data from multiple sources. Under license from the platform manager, they “vacuum up” data about platform users and the interactions they engage in, which they generally resell to other companies for purposes such as advertising placement. The platform that is the source of data shares a portion of the profits generated. E.g., data on facebook about vacation needs sold to advertising agency

Question 19

Extension developers elaborated

Answer 19

Wether the platform should be open to extension developers are a crucial openness question.

If the platform is too closed, it will lose the opportunity to provide valuable extra services to the platform users, perhaps alienating participants in the process. But if the platform is too open, then it’s likely that poor quality service providers will join the platform, tarnishing the reputation of the other developers

Some companies erect steep barriers against extension developers not just to protect the quality of platform content but also in an effort to retain control of the revenue streams their platforms generate

Question 20

API (in relation to extension developers)

Answer 20

Application Programming Interface, often used if the platform is open to extension developers.

An API is a standardised set of routines, protocols, and tools for building software applications that makes it easy for an outside programmer to write code that will connect seamlessly with the platform infrastructure

Question 21

Two principles when considering extension apps and developers

Answer 21

First, if a particular app has the potential to become a powerful platform, the manager of the platform that hosts the app should seek to own it – or to replace it with an app controlled by the platform itself

Second, if a particular functionality is reinvented by a number of extension developers, and gains widespread acceptance by platform users, the manager of the platform should acquire the functionality and make it available through and API

Question 22

User participation

Answer 22

In particular producer openness, which is the right to freely add content to the platform

The platform’s objective in opening to these users is to facilitate the creation and provision of as much of as much high-quality content as possible. However, it is often more closed due to the fear of low quality content

Question 23

Curation in user participation

Answer 23

Curation usually takes the form of screening and feedback at critical points of access to the platform. Screening decides who to let in, while feedback encourages desirable behaviour. A user’s reputation, as shaped by past behaviour both on and off the platform, is usually a key factor in curation

Curation can be managed through human gatekeepers – moderators who personally screen users, edit content, and provide feedback designed to promote quality (time-consuming and costly)

A better system relies on users themselves to curate the platform, generally through software tools that quickly gather and aggregate feedback and apply it to curation decisions

Question 24

Platforms can differentiate using different kind of openness

Answer 24

These variant openness regimes will attract different kind and numbers of participants, generate distinct ecosystem cultures, and may ultimately produce divergent business models