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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.

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In the previous lectures we both discussed entry barriers as well as the characteristics of platform based-markets. If we look at previous literature, most papers focus on how resources and capabilities possessed by an entry enfant affect its post-entry performance in traditional markets (Helfat and Lieberman, 2002). However, as platforms are becoming more and more important, it is interesting to zoom in on how succeeding as an entry differs between traditional markets and platform-based markets. I believe that different factors are applicable when looking to the success of entrants in platform-based markets.

First of all, platform-based markets consist of multiple parties who conduct transactions. This is, as discussed in the lecture, referred to as a two- or multisided platform. Platform providers must get both consumers and developers of complementary applications on board in order to succeed (Liebowitz, 2002). This is a key difference compared to traditional markets and an important consideration when it comes to entry success.

If we look at traditional markets, prior literature shows that quality is one of the main drivers of success for entrants on the long term (Liebowitz and Margolis, 1994; Rangan and Adner, 2001; Liebowitz, 2002; Suárez and Lanzolla, 2007; Tellis, Yin, and Niraj, 2009). More specifically, Rangan and Adner (2001) states that ‘innovative late entrants can outsell incumbents’. I believe this driver also holds for platform-based markets, but in a slightly different way. This is confirmed by the study of Evans (2003), who concluded that early entrants in those markets do not always retain their leadership position on the long term. Also the study of Tellis and Niraj (2009) find evidence that quality is dominant over entry-date.

Besides quality, also the timing of the entry is found to be very important in traditional markets. Especially when the market is very competitive and dynamic, the decision to enter the market should be timed to balance the risks of premature entry against the missed opportunity of late entry (Lilien and Yoon, 1990). Looking at platform-based markets, it sounds reasonable that timing is also essential. As most of the users of the platforms experience high switching and multi-homing costs, the risk of a late entry is high. On the other hand, an earlier entry can result in failing to reach the critical mass because people are not yet ready for it.

From a platform-based market perspective, a lot of other more specific factors come into play. The most important difference with a traditional market is the existence of indirect and direct networking effects. This phenomenon has large consequences for market entries. Firms within the market are relying on the interdependence between consumer demands and demands for their associated applications. Prior literature theorized that because of those network effects, platforms with a small market dominance on both sides have a relatively big advantage. They state that a dominant player is more likely to attract additional users and application developers. As a result, it might become a monopolist even if its quality is not superior. If we reverse this reasoning, this means that even when the quality of the entry is superior, the entry is likely to fail due to network effects. A new social platform will have a hard time competing with Facebook, even when its quality is higher.
Besides networking effects, also consumer expectations are identified as a predictor of success for platform-based market entries. Katz and Shapiro (1994) and Farrell and Klemperer (2007) explains that expectation of consumers of future market share of the platform are critical regarding the market entry. In traditional markets, consumers are more focused on relatively short-term usage. Potential platform users on the other hand are more dependent on market prospects of the platform.

I believe there are several factors when it comes to success of entries which both holds for traditional as well as for platform-based markets. As a conclusion, I believe that quality and market timing are primarily important when entering a traditional market. These factors are also important for platform-based markets entries, but they also have to deal with additional, even more important factors. The most critical ones are networking effects (direct and indirect) and consumer expectations.

I am very curious what you guys think of the abovementioned success factors. Please feel free to share your thoughts in the comments!

References:
Farrell, J., & Klemperer, P. (2007). Coordination and lock-in: Competition with switching costs and network effects. Handbook of industrial organization, 3, 1967-2072.

Helfat, C. E., & Lieberman, M. B. (2002). The birth of capabilities: market entry and the importance of pre‐history. Industrial and corporate change, 11(4), 725-760.
Katz, M. L., & Shapiro, C. (1994). Systems competition and network effects. The journal of economic perspectives, 8(2), 93-115.
Liebowitz, S. J., & Margolis, S. E. (1994). Network externality: An uncommon tragedy. The Journal of Economic Perspectives, 8(2), 133-150.

Liebowitz, S. (2002). Rethinking the networked economy: The true forces driving the digital marketplace. AMACOM Div. American Mgmt Assn, Dallas.

Lilien, G. L., & Yoon, E. (1990). The timing of competitive market entry: An exploratory study of new industrial products. Management science, 36(5), 568-585.
Suarez, F. F., & Lanzolla, G. (2007). The role of environmental dynamics in building a first mover advantage theory. Academy of Management Review, 32(2), 377-392.
Tellis, G. J., Yin, E., & Niraj, R. (2009). Does quality win? Network effects versus quality in high-tech markets. Journal of Marketing Research, 46(2), 135-149.
Zhu, F., & Iansiti, M. (2012). Entry into platform‐based markets. Strategic Management Journal, 33(1), 88-106.