Modern platforms are struggling with a complex trade-off: openness versus closed. It is not hard to imagine that openness stimulates innovation and – to some extent – it helps reaching critical mass. However, a closed platform results in a more controlled environment. As a result, quality is easier to ensure and intellectual property is better protected (Boudreau, 2010). Because of this trade-off, openness has a big influence on the firms’ success and market potential. But the big question is: under which circumstances should a firm be more open?
First of all, a platform can be open at three different levels: at a provider, technology and user level (Ondrus et al., 2015). Openness at the provider level is concerned with how key stakeholders of the providers of the platform are influenced. More specifically, it focus on the strategic architectural decisions that has consequences for a platform’s market potential. Secondly, the technology level is about how various technologies can be integrated into the platform. In other words, it focus more on the compatibility with other (competing) platforms. Lastly, the user level is the most intuitive one. The openness at the user level is defined by the level of discrimination that the platform exercises against different segments of the potential customer base (Ondrus et al., 2015).
The market potential from a provider perspective is influenced by several positive and negative consequences. The most important advantage is the increase in access to resources and capabilities (West, 2003), because a more open strategy will result in more collaboration. In addition, also costs can be shared which is obviously an advantage for the platform (Eisenmann et al., 2006). However, there are also some negative aspects. Less control over the platform, increase in risk of antitrust issues, increase in inter-firm coordination issues and reduce ability to capture rents are the main disadvantages (Boudreau, 2010; Greenstein, 1996; Gawer and Cusumano, 2002; Parker and Van Alstyne, 2014; Evans, 2002). As explained earlier, the decrease in control is the most important and obvious one.
If we look at the technology level, some other factors can be identified. Leeching off the benefits of other interoperable platforms and sharing deployment of new technological infrastructure are two obvious advantages (Eisenmann et al., 2006; Boudreau, 2010). However, working together with other platforms can also have some negative consequences. As discussed in the lectures, we can reason that profits are reduced by less multi-homing and lower industry unit. Also the incentive for a platform to invest in the technology when there is more openness, is reduced (Shapiro and Varian, 1998). I believe this might have negative consequences for both the platform itself, as well as for the industry as a whole. Lastly, the platform gives away their benefits to competitors, which is also a disadvantage of more openness on the technology level (Shapiro and Varian, 1998).
Also openness on the user level is important for a firm’s market potential. As explained earlier, prior literature has often showed that openness increases innovation. As a result, users can benefit from an open strategy on the long-term (Boudreau, 2010). Also additional co-creation opportunities will arise, which is not only interesting for the platform, but also for users (Ceccagnoli et al., 2012). However, open innovation will lower switching costs due to collaboration. The lower lock-in effect can be identified as a negative consequence of openness (West, 2003; Parker and Van Alstyne, 2013).
To conclude, I think that the openness trade-off is crucial for the market potential of a firm. However, as their exist three different levels of openness (the provider, technology and user level), this trade-off is pretty complex. For companies where reaching critical mass is a critical success factor, openness on the user level is in most cases a logical thing to do. However, it can be closed on the provider level at the same time, because it wants to remain control.
Openness on a different level has different consequences for the firm. Therefore, I think there is no general ‘manual’ to answer the question: it depends on the type and goal of the platform whether the advantages of openness outweigh the disadvantages.
References
Boudreau, K. (2010). Open platform strategies and innovation: Granting access vs. devolving control. Management Science, 56(10), 1849-1872.
Cusumano, M. A., & Gawer, A. (2002). The elements of platform leadership. MIT Sloan Management Review, 43(3), 51.
Eisenmann, T., Parker, G. and Alstyne, M. (2006). Strategies for Two-Sided Markets, Harvard Business Review 84(10): 92–101.
Evans, D. S. (2009). How catalysts ignite: The economics of platform-based start-ups. Platforms, markets and innovation, 99-128.
Evans, D.S. (2002). The antitrust economics of two-sided markets [WWW document] http://dx.doi.org/10.2139/ssrn.332022 (accessed 14 January 2015).
Greenstein, S. (1996). Invisible Hand Versus Invisible Advisors: Coordination mechanisms in economic networks, in E. Noam and A. Nishuilleabhain (eds.) Private Networks, Public Objectives, Amsterdam and New York: North-Holland, pp 135–161.
Parker, G., & Van Alstyne, M. (2010, June). Innovation, openness & platform control. In Proceedings of the 11th ACM conference on Electronic commerce (pp. 95-96). ACM.
Parker, G., & Van Alstyne, M. W. (2014). Platform strategy.
Ondrus, J., Gannamaneni, A., & Lyytinen, K. (2015). The impact of openness on the market potential of multi-sided platforms: a case study of mobile payment platforms. Journal of Information Technology, 30(3), 260-275.
Shapiro, C. and Varian, H.R. (1998). Information Rules: A strategic guide to the network economy, Boston, MA: Harvard Business School Press.
West, J. (2003). How open is open enough?: Melding proprietary and open source platform strategies. Research policy, 32(7), 1259-1285.
You are making some interesting points that highlight the though trade-off decisions that need to be made. My personal opinion is as well that there is no set strategy that a company needs to follow, based on its type of goal or platform. I tend to think that it’s more of transformational process.
If we take a look at the Amazon Echo and Google Home, we can see that they have a closed supplier role at the moment. Both Google and Amazon are determining who can offer services to customers. This might be a good first-mover strategy to obtain revenues from the supplier side. However, when time surpasses and customers have adopted the product, it is to be expected that the demand-side users no longer wants to be limited by these choices. As a result will platform need to revise their strategy of openness to remain competitive.
Therefore it seems to me that it’s important that this strategy formulation is an iterative process and that we need to consider that once good choices can turn bad.