Platform Ecosystems: How Developers Invert the Firm

Competition Policy and Antitrust, Intellectual Property and Interoperability

Article Snapshot

Author(s)

Xiaoyue Jiang, Geoffrey Parker and Marshall Van Alstyne

Source

MIS Quarterly, Vol. 41, No. 1, pp. 255-267, 2017

Summary

This paper describes why firms like Apple, Microsoft, and Google choose to orchestrate the creation of products by outside developers rather than to create product internally. Firms that produce digital products like software benefit most from this strategy, because of knowledge spillovers.

Policy Relevance

Opening a platform to more developers stimulates growth.

Main Points

  • Firms decide whether to produce goods or services themselves, or to orchestrate production of goods or services by others.
     
    • Software firms benefit most by orchestrating production of code by outside developers.
       
    • Apple, Google, and Microsoft became the most valuable firms in the world in 2015.
       
  • Opening a platform to give outside developers access results in a tradeoff; the platform owner earns less net revenue on the core platform but fosters more growth.
     
    • The closed Apple platform charges higher prices for the core platform, and earns higher profit margins than Google.
       
    • Google’s open Android platform attracted more developers.
       
  • Opening source code produces knowledge spillovers, when developers attach to and build on other developers’ ideas.
     
  • When platforms compete, the platform owner benefits from opening the platform to outside developers; without competition, platform owners prefer the higher profits from keeping a platform closed.
     
  • Traditionally, firms grew by merging with firms that owned complementary assets (vertical integration), but, with enough developers, the strategy of opening a platform to developers is better, especially with digital goods.
     
    • Open platforms allow many firms to benefit from knowledge spillovers.
       
    • Digital code can be easily reused by many firms, unlike physical goods, so spillovers are greater with digital goods.
       
    • An open platform benefits from others’ innovation without managers’ knowing which developers will succeed.
       
  • A platform can become so valuable that the owner need not give it away to stimulate growth, and can close the platform to capture more profits; for example, the Android platform became more closed, as Google reasserted control over the interface and applications like Google Maps.
     
  • The platform manager must consider the value of the platform as an ecosystem, not just the value of the platform’s products in isolation; a platform can profit from cannibalizing a core product to increase the value of the system overall.
     
  • Developers are not free to re-use others’ code until patent rights have expired; as the number of developers increases, the benefits of knowledge spillovers increase, and all would benefit from shorter terms of patent protection.
     

 

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