Platform Ecosystems: How Developers Invert the Firm
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ARTICLE 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.
KEY TAKEAWAYS
- 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.
- Software firms benefit most by orchestrating production of code by outside developers.
- 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.
- The closed Apple platform charges higher prices for the core platform, and earns higher profit margins than Google.
- 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.
- Open platforms allow many firms to benefit from knowledge spillovers.
- 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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About Geoffrey Parker
Geoffrey Parker is Professor of Engineering at the Thayer School of Engineering at Dartmouth College where he also serves as Director of the Master of Engineering Management Program. He is also a Visiting Scholar and Research Fellow at MIT’s Initiative for the Digital Economy. Professor Parker has made significant contributions to the field of network economics and strategy as co-developer of the theory of “two-sided” markets. His current research includes studies of distributed innovation, business platform strategy, and technical/economic systems to integrate renewable energy.
See more with Geoffrey Parker
About Marshall Van Alstyne
Marshall Van Alstyne is the Questrom Professor in Management, Professor of Information Systems, and Department Chair of Information Systems at Boston University's Questrom School of Business. He is one of the leading experts in network business models. Professor Van Alstyne conducts research on information economics, covering such topics as communications markets, the economics of networks, intellectual property, social effects of technology, and productivity effects of information.
