Session 7 Flashcards
When is a system called a platform?
● The system must provide a useful function / service & allow 3rd party access.
● Products have features, platforms have communities.
Examples:
○ iTunes: get music onto iPod
○ SAP: execute ERP systems
○ Facebook: connect family, friends & acquaintances
○ Cisco Smart Grids: capture AC/DC sources, route power
○ Nike Fuel: motion capture and social benchmarking
A platform:
● Is a nexus of rules and architecture
● Is open (or closed), allowing regulated participation
● Actively promotes (positive) interactions among different partners in a multi-sided market
● Scales much faster than a pipeline business because it does not necessarily bear the costs of external production
Platform vs product based business model
Examples
● Examples of platform-based business
Facebook, Google, Spotify, Bol.com
● Examples of product based business
○ Kruidvat, L’oreal, Coca cola,
○ Linear value chain
Network Effects Definition
Network’s value to a user depends on the number of other network users
(Demand-side Economy of scale)
Network Effects “Value”
“Value” = willingness-to-pay for network participation = WTP for platform affiliation = cap on platform fees
Network Effects is also called:
Network externalities
Direct network effects
value to me depends directly on number of users (e.g., Fax machine, telephone, email, Facebook)
Indirect network effects
value to me depends on adoption of some complementary products (e.g., DVD players / DVD disks, eBook reader / content, Payment system, eBay and online auctions)
Supply Economy of Scale
- Falling average costs
- Monopolistic supply
- Utilities, Semiconductors
Demand Economy of Scale
- Value grows with volume
- Monopolistic Demand
- Often falling average cost
- Operating Systems, Instant Messaging, Social Networks
Network effects are …
demand-side scale economies.
Rising network effects increase existing and prospective users’ willingness-to-pay (willingness-to-participate)
Supply-side scale economies are realized when…
firms reduce unit costs by leveraging fixed costs or experience effects.
demand-side and supply-side economies are conceptually distinct:
unit cost reductions that result from network growth should not be labeled network effects
Different price arrangements for platforms
Platform flows
- Transaction cut
- Pay for access
- Attention
- Pay for tools
Transaction Cut
● Charge a fee for facilitating transaction
● Don’t take too much (e.g. Amazon tried publisher’s rake of 70%)
● Examples: Airbnb, Etsy, eBay , iTunes, Uber
Pay for access
● Charge fee for facilitating lead generation
● Charge side that needs the other more
● Examples: OpenTable, Match.com, LinkedIn
Attention
● Charge fee for similar match
● Do not clutter the transaction
● Examples: YouTube, AdWords, Facebook
Pay for tools
● Charge fee for better / upgraded tools
● Basic versions often free
● Examples: Flikr, Vimeo, Pinterest, SAP, LinkedIn
To price a platform with network effects, who gets the subsidy?
The side that is the stronger attractant (or that creates more value)
Choose a price for each side, factoring in the impact on the other side’s growth and WTP
Subsidy side: attract users and grow network size
Money side: pay for the privilege of gaining access
Price-sensitivity vs. quality-sensitivity
Goal of the right pricing
generate cross-side network effects
Adjacent platforms:
platforms serving similar or overlapping user bases.
Platform envelopment:
entry by one platform provider into another’s market
Threats of envelopment
- can afford aggressive pricing
- installed customer base, cross-marketing
- customer retention
Mechanism Bundling | Efficiency Gains
- Transaction and production cost savings
- Improved user experience
Mechanism Bundling | Price Discrimination
Reduces heterogeneity in consumers’ aggregate valuations
Mechanism Bundling | Strategic Advantages
- Extend market power into complement market
- Protect core market by foreclosing rivals’ access to key complement
Platform envelopment attack types
- Foreclosure attack (complements)
- Intermodal attack (weak substitute)
- Conglomeration attack (functionally unrelated)
Foreclosure attack (complements)
● With a foreclosure attack, the platforms are complements. If envelopment reduces the appeal of a standalone provider’s crucial complement, the attacker may strengthen its position vis-à-vis rivals in its core market.
● Example: Microsoft bundling Media Player with its Windows operating system.
Intermodal attack (weak substitute)
● With an intermodal attack, the platforms are weak substitutes, and the attacker may neutralize an emerging competitive threat.
● Example: Blockbuster bundling DVD-by-mail service with store rentals.
Conglomeration attack (functionally unrelated)
● A conglomeration attack means that platforms are functionally unrelated but may share common users and components. In such an attack, bundling can yield significant economies of scope.
● Example: Apple iPhone bundling smartphone with iPod.
Defence against platform envelopment
- Match bundle
- Find a “big brother” via merger or alliance
- Cede and redeploy
- Sue
Effects of Mechanism Bundling
- Efficieny Gains
- Price Discrimination
- Strategic Advantages
Foreclosure attack
The platforms are complements
Intermodal attack
The platforms are weak compliments
Conglomeration attack
The platforms are functionally unrelated
