A HBS articles explores the nature of software platforms
Not only are existing industries being transformed and sometimes toppled by software platforms, but new industries are also springing up around them; witness the multibillion-dollar ringtone business.
On the destructive and constructive nature of platforms:
Software platforms have also been the source of much creative destruction. The reduction in transaction costs and increases in efficiency brought about by digital technologies powered by software platforms have been so great that the so-called “old guard” was displaced (or may be on its way to extinction)
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Software platforms have accelerated technological innovation by providing springboards that allow specialized producers to leverage their infrastructure and create new innovations and by bringing digital technology to a wide variety of sectors and users
The Apple question inevitably makes its appearance:
Software platforms naturally lead to multi-sided business but Apple seems to be the outlier in all this ferment. What are the lessons of Apple’s contrarian approach? Will this come back to bite them?
A: Let me first make a clarification. Apple’s computer business is definitely multi-sided, just like Microsoft’s, except Microsoft Windows has three sides (end-users, application developers, and hardware makers) whereas Mac OS has only two sides (end-users and application developers—Apple does the hardware). Apple’s decision to stay two-sided rather than three-sided is in large part the reason for which Windows-based PCs have today a 95 percent-plus market share, whereas Macs are at less than 4 percent. So in this business I think everyone—including Apple—has learned the obvious lessons there were to learn: Whereas control over quality in the initial stages may have been a good reason to stay away from that third side, the latter is necessary in order to achieve sufficient scale in the market, particularly in the face of competition.
Losers will include anyone providing a brick-and-mortar product or service that can be digitized and put on a software platform.
If we turn to Apple’s iPod/iTunes business, it superficially looks multi-sided, in the sense that Apple has “gotten on board” music publishers and consumers. But in fact, Apple has done so in a one-side-at-a-time way, by first licensing the music (essentially taking “possession” of the music licenses) before turning to consumers and selling it to them (at a price and under a format entirely controlled by Apple) along with iPods. This took the chicken-and-egg aspect (characteristic of multi-sided businesses) out of the equation, which again might have been the right thing to do to get started.My personal view is that in the face of an explosion in the number of digital music services (download and/or subscription) rivaling iTunes and that of digital music players (rivaling iPod), Apple should turn to a truly “multi-sided” model, by opening up iTunes and devolving more control to music publishers in order to achieve more variety of the music offering—thus trying to become the eBay of digital music.
The broad lesson here is that ingenious product design can take you very far; however I am willing to take a bet that in any multi-sided market, sooner or later, even the best product design will end up subordinated to the best multi-sided platform in town.
A prediction of how platforms will evolve and who will win and lose:
The winners will be of course the providers of the most versatile and flexible software platforms, i.e., those that can span the widest range of functionalities and markets, and also those that will perform the most fundamental functions, which in my view are search and payments. Another category of winners will be of course the owners of valuable content—be it games, music or movies—software platforms will allow them to monetize and distribute their content in ways which were previously not possible. Needless to say, consumers will also gain a lot.
Sounds like Google and Apple.
Losers: anyone providing a brick-and-mortar product or service that can be digitized and put on a software platform—unless the producer does it him- or herself. Example: newspapers.
The article does not explore the implications of standards on platform adoption and extension. I wonder if the losers will include proprietary software firms who must compete with standards based platforms – which presumably will allow developers to monetize and distribute their applications in ways which were previously not possible. Any company come to mind immediately?
