Platform Economy

Kimmo Karhu
Department of Computer Science, Aalto University
29.11.2018
The shift towards platform business models is trans-
forming competition in all industries all over the world
During the last decade, new Firms with platform business models
incumbents have become the most create new businesses and challenge
valuable companies in the world by the established competition in more and
utilizing platform business models more industries every day

Share of leading platform firms in

S&P500
~11%

~2 %

2008 2018
Cumulative downloads in App Store

30.11.2018
3
Apple iOS ”nation” vs Finland in 2016

Apple iOS: Finland:

App Store revenues Information and
Communication Industry

23,8 Mrd € 20,8 Mrd €

https://tilastokeskus.fi/til/vtp/2016/vtp_2016_2017-07-13_tie_001_fi.html

https://www.apple.com/newsroom/2017/01/app-store-shatters-records-on-new-years-day/
Platform economy
fundamentals
From technical platforms to platform
economy
Internal to the firm Alliance / Industry Open to crowds at arms-lenght

product industry platform

platform platform economy

Opening the platform

https://techcrunch.com/2018/06/04/app-store-hits-20m-registered-developers-at-100b-in-revenues-500m-visitors-per-week/
Apple decided to open up
and give out app
production to 3rd parties
However, initially Jobs resisted …
• "I called him a half dozen times to lobby for the potential
of the apps"
– Apple board member Art Levinson
• "I couldn't imagine that we would create something as
powerful as the iPhone and not empower developers to
make lots of apps. I knew customers would love them.“
– SVP of worldwide product marketing Phil Schiller

It is not easy - in today’s exercise we will force

ourselves the platform way
Platform economy in medieval times

CONSUMER

BOUNDARY PRODUCER
RESOURCE
PLATFORM
Platform economy in a nutshell

1. Direct interaction that removes friction

2. Growth through network effects
3. Digitalisation enables extended scale and scope
4. Production at arms-length using boundary resources
Direct interaction

● Platforms are essentially matchmakers that enable two

sides—for example, producer and user—to directly interact
with each other
○ Market square: Sellers and buyers
○ Uber: Drivers and commuters
○ Android: App developers and smartphone users

● By cutting out the unnecessary middlemen, platforms

remove considerable friction
Group discussion on friction

First, individually write down (1-2min)

What was the friction that App Store
removed from app publishing?

Then discuss your ideas in groups of 2-3

students (3min)

Share your thoughts with the class

https://en.wikipedia.org/wiki/Friction

30.11.2018
17
Pipeline vs Platform business model

Producer Sales channel Consumer

Producer Direct interaction Consumer
You as a
producer
Network effect

Producer Sales channel Consumer

Boundary resources

Platform
You as a
You as a platform
reseller
PIPELINE / RESELLER BUSINESS MODELS PLATFORM BUSINESS MODEL
Network effects

● When the benefit of one side depends on

Network effect
the amount of participants on the other
side, platform growth is boosted by
Side 1 Side 2
network effects
• The more (and varied) apps → The more
useful the platform is for users
• The more users → The more attractive the
Platform
platform market is for developers
Four types of network effects
Positive

Prefer more users on Prefer more users on

same side the other side
(e.g., social network) (e.g., smartphone apps)

Cross-side
Same-side

(indirect)
(direct)

Prefer less users on Prefer less users on the

same side other side
(e.g., producer (e.g., advertisements)
congestion)

Negative

30.11.2018
20
Network effect
● For multisided platforms, there may be multiple
network effects that cross-feed each other, e.g.,
Android:
● developers and users
● device manufacturers and users
● Chicken-and-egg problem: How to attract one
side when neither is initially present?

© Aalto University Executive Education

30.11.2018
21
Digital superpowers
• The Internet and other digital connectivity technologies enable an
immediately global scale
• Digital software and data are easy to modify and combine, opening up
vast opportunities and scope for third-party innovation
- Re-proggrammability
- Modular nature (interfaces)
- Data homogenization
• These superpowers expand both the scale and scope of business in the
digital space
- Contrast with area and human labor requirements of the medieval market square
Venice operated at boat speed
• Venice was a flourising
global market place due to
its naval trading routes (cf.
digital scale)
• Also innovation flourished
in renessaince time (cf.
digital scope)
Digital platform & complements
• An extensible digital core that is opened for third parties to contribute
improvements or add complements to it
• Note! Both core and complements may be either software or data
• Google Android + apps
• Google Maps + place information
Add value to the
total offering
Complements

Depend
More value
together than
separately Platform Core Stable basis
providing basic
functionality
Group discussion on Google Maps

First, individually write down (1-2min)

What is/are the network effects in Google Maps

Then discuss your ideas in groups of 2-3 students

(3min)

Share your thoughts with the class

30.11.2018
25
Boundary resources

• Resources on the “boundary” of the

platform that enable and foster 3rd party
production Producer Consumer

• E.g., APIs and SDKs

• Essential in governing the participants at
arms-length distance Boundary resources

• no need for resource intensive and costly

interaction facilitated by the platform owner Platform
Fourkind Platform Canvas
Producer Direct interaction Consumer

Network effect

Boundary resources

Platform
Typology of ”digital” platforms
Social Complementing Market place Freelancing Asset sharing

Information
Producer Complementor Seller Professional Asset owner
publisher

Information
Consumer User Buyer Hiring firm Asset user
consumer

Physical
Complement/ Value adding digital Digital or physical Physical resource or
Social information Human resource
Offer software or data good/service its usage
Digital

Android, iOS, Amazon (B2C), Upwork, Uber, Cohealo, AirBnB,

Examples Facebook, Linkedin
Google Maps Alibaba (B2B) LinkedIn Uber

• Can be combined: E.g., Uber is both an asset sharing and a freelancing platform
• Examples help to communicate your platform idea: E.g., ”Upwork of Professional Education”

© Aalto University Executive Education

30.11.2018
28
Boundary Resources
Example: Android platform stack

System apps User apps Boundary resources

Google API
Play
Services App framework and libraries

Platform core
(system services, runtimes, etc) Google Mobile Services
(GMS)
PROPRIETARY!
Kernel (e.g. Linux)
Android open-source
platform (AOSP)
Hardware Apache License 2.0
Boundary resources are the
concrete tools & rules that help to
deal with platform’s governance
challenges

30.11.2018
31
Three main functions for boundary
resources
1. Define openness Producer Consumer

2. Tools to foster interactions

3. Rules to control the platform
Boundary resources

Platform
1. Define openness
Dimensions of openness
1. Access openness
• Let external actors to join the platform and do business
• Rationale: Generate network effects, and extract value from
complementarities
2. Resource openness
• Open-source or otherwise give out your IPR (that you have invested in)
• Rationale: Strategic forfeiture - recover costs from somewhere else

• Can be analyzed for each side separately

• For chosen type of openness, level of openness may also differ
Group discussion on openness
First, individually write down (1-2min)
How Apple iOS is open considering the two forms of
openness?
- Access openness
- Resource openness
- What about Google Android?

Then discuss your ideas in groups of 2-3 students

(3min)

Share your thoughts with the class

30.11.2018
35
 Apple iOS Google Android
Access • Developers • Developers
openness • Ad service providers • Device manfufacturers
• Ad service providers
Resource • Webkit (browser • Android Open Source
openness engine) Project (AOSP)
• But keeps Google Mobile
Services (GMS) proprietary
BRs define access and resource openness
towards different sides
App App store
developers APPS
providers

API APK

Open-source
license
Android Platform

HARDWARE ABSTRACTION
LAYER (HAL)

Hardware
HARDWARE
manufacturers
2. Tools to foster
interactions
How to build outstanding
producer experience?
Beyond APIs
• Orchestrated use of various kinds of
boundary resources
• Software development kits (SDK)
• Market place Producer Consumer

• Monetization mechanisms
• Revenue share
• In-app purchases APIs, marketplace, monetization
• Advertisement tools
Platform
• Instead of brute-forcing new APIs, can you
Data
offer new functionality that truly stimulates sharing
rules
3rd party innovation?
• E.g., location and accelerometer APIs for gaming
Case Android: How to deal with
fragmentation of installed base?

http://opensignal.com/reports/2015/08/android-fragmentation/
What is the problem with fragmentation from
the platform strategic perspective?

Complements

APIs

It is difficult to provide one set Bundled by

of APIs to complementors Platform Core
manufacturer
(precious and numerous
partners) who depend on
them Hardware
Google invented Google Play Services
• Wrapping own APIs inside Google Play Services
client library that is distributed through Google
Play
• APIs can be fixed regardless of manufacturer
update policy
• Can be updated to any Android version
• Rapid deployment to all developers and devices
• Building developer loyalty to Google APIs /
services

https://developers.google.com/android/guides/overview
3. Rules to control the
platform
Rules to control different sides
App
developers APPS 4.5 You may not use Google Play to distribute or
make available any Product which has a purpose
Publisher terms & conditions that facilitates the distribution of software
applications and games for use on Android

contract (MADA)
devices outside of Google Play.

mebership
Alliance
Android Platform

Compatibility definition
document & test suite
(CDD&CTS)
Hardware
manufacturer HARDWARE
s

11/30/2018
44
Thank You! Some recommended
additional reading materials
• Platform Economy
• Fourkind Platform Economy Handbook
• Platform Revolution: How Networked Markets Are Transforming
the Economy and How to Make Them Work for You
• Articles
• Eisenmann, Parker, and Van Alstyne (2006): Strategies for Two-
Sided Markets
• Andrei Hagiu (2014): Strategic Decisions for Multisided
Platforms
• Karhu, Gustafsson, and Lyytinen (2018): Exploiting and
Defending Open Digital Platforms with Boundary Resources