What Makes the Platform Network Effects Unsustainable?: Winner-Take-All Strategies and Unpaid Complementors

What Makes the Platform Network Effects Unsustainable?: Winner-Take-All Strategies and Unpaid Complementors

Wiboon Kittilaksanawong (Saitama University, Japan)
DOI: 10.4018/978-1-4666-9787-4.ch170
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Introduction

A large number of business transactions via electronic commerce (ecommerce) have been increasingly organized around platforms. Platforms for such transactions include PC operating systems, digital PDAs, Web-based systems, and video game consoles. Ecommerce on video game consoles operates in transactions among application developers (e.g., game producer) and consumers (e.g., game player). Sony, Nintendo, and Microsoft provide their respective incompatible platform that not only mediates transactions between video game consumers and developers of complementary applications and content but also creates connections among game consumers. Platforms are thus two-sided or multisided, functioning as an interface between multiple groups of users and facilitating value creation exchanges (Boudreau, 2010).

Competition in platform-based markets is often characterized by indirect network effects (Chen & Xie, 2007). In particular, more applications available on a platform lead to greater consumer demands for that platform. Meanwhile, a larger installed base of such consumers leads to a larger supply of such applications. Because of such network dynamics, a platform with the largest number of users could tip the market in its favor and result in the winner-take-all (WTA) outcome (Caillaud & Jullien, 2003). Therefore, an established platform with a large installed base via its first-mover advantages tends to monopolize the market (Lieberman & Montgomery, 1988). Consumers and developers of such platform believe that everyone else will adopt such platform.

To attain WTA outcome, platforms aggressively expand both installed base of users and application providers to create mutually reinforcing benefits on each side of the market (Eocman, Jeho, & Jongseok, 2006). For example, platforms may set low price to grow their installed base of users and charge developers of applications that access the platform to reach these potential customers (Clements & Ohashi, 2005). Platforms may also use attractive licensing deals to attract a larger number of application developers or use exclusive contractual agreements to limit the supply of similar applications to rival platforms (Mantena, Sankaranarayanan, & Viswanathan, 2008).

In addition to such pricing mechanisms, platforms have increasingly expanded through attracting unpaid complementors, who receive no monetary benefits from their contributions to the platform (Boudreau & Jeppesen, 2014). Most content contributors to YouTube, for example, pursue neither direct sales nor advertising revenues. Members of the public contributors to CNN iReports provide free offerings to users of commercial news platforms. With Apple’s iPhone, jailbreaking developers of complementary software applications, which are not available on the official AppStore, also work outside of a traditional price system. The investments made by these complementors in the platform are motivated by factors other than usual monetary incentives from sales of their contributions.

Building on the network economics in the context of these emerging phenomena with the focus on video game markets, this study examines three important challenges in the growth strategies of a platform. First, given that the incumbent platforms possess first-mover advantages, whether and how could a late entrant be successful in taking over market leadership of the incumbent? Second, as platforms aggressively pursue multiple expansion strategies on both or multiple sides of the market (e.g., application developers and consumers), would there be trade-offs in concurrently implementing these strategies? Third, could platforms sustainably expand through increasing number of unpaid complementors?

Key Terms in this Chapter

Indirect Network Effects: Effects that an increase in usage of one product or network leads to an increase in the value of a complementary product or network on the other side of the network, which can in turn increase the value of the original.

Two-Sided Network Effects: Effects that an increase in usage by one set of users increases the value to and participation of a complementary and distinct set of users, and vice versa

Complementors: Businesses that directly sell products or services that complement the products or services of another company by adding value to mutual customers.

Winner-Take-All Market: A market in which the best performers are able to capture a very large share of the market and rewards, whereas the remaining competitors are left with very little share

Platform Markets: Economic platforms that have two or more distinct user groups who provide each other with network benefits through value creation exchanges (also called two-sided or multi-sided markets).

Blue Oceans: Uncontested market spaces for an unknown industry or innovation which are associated with high potential profits, coined by W. Chan Kim and Renee Mauborgne in their book “Blue Ocean Strategy: How to Create Uncontested Market Space and Make Competition Irrelevant”.

Network Effects: Effects that one user of a good or service has on the value of that product to other users (also called network externality or demand-side economies of scale).

Direct Network Effects: Effects that an increase in usage leads to a direct increase in value for other users on the same side of the network.

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