Saturday, November 14, 2009

Business models turning products into platforms

Most products can be subdivided into smaller parts (modules) that can be independently created and then used in different systems for multiple uses. Classical examples of modular systems are complex products such as airplanes, cars and computers, comprising of many different subsystems. Technology and IP based business models take further steps breaking down each invention, algorithm or other valuable asset into the smallest possible components consisting of isolated, self-contained functional elements, to be used in different technology, products and systems for multiple uses.

What is a platform product?
A platform product can be seen as a product that enables one or more additional products or services to expand the platform product's capabilities and features such as functionality, performance or design. Digital examples are Microsoft's Windows, Google's Android platform, Facebook and Twitter, where application developers are able to develop software for users to chose, adding functionality not included in the original platform product. Some physical examples are cars, bicycles, SLR cameras or computers, with their spare parts, tuning kits, peripherals and other accessories. Increasingly physical components becomes connected and integrated with digital ones with fundamentally physical products such as houses or trucks becoming platforms for numerous of digital services for its owners, users, and other stakeholders.

Enabling flexibility and customization
Customers or users seldom want the same thing and have different price sensitivity and prioritizations for different features such as performance, design, portability or functionality of a product. At the same time few are those who are willing to pay for more things or functions than they need, unless they have to. Providing a product as a platform, it can be made more simple and flexible, often to a lower cost, enabling alternations and extensions into many different directions based on customer preferences. It might also enable upgrades and new features not yet discovered when the platform is being sold. Different components or modules can also be sold with different rights or license terms tied to them.

Platform compatibility
Different control mechanisms, such as trademarks, product design, design protection, patents and contracts are often used in combination to control the compatibility of a product platform from other companies' additional products. Depending on the competitive setting, the developed control position and chosen business strategy, the company offering both the product platform and extensions can either compete or be a monopolist in the market for platform products and/or additional products. Companies may for various reasons, such as decreasing the time of development or to provide bigger variety of additional products, chose to allow competition and allow customers to choose additional products offered by competing or complementary firms.

Closed, semi-open and open platforms
The product platform can be totally closed or totally open in many different ways such as "open for everyone to develop and sell additional products", "open for licensees signing away certain rights to develop and sell additional products", "additional products must be sold through the platform owner" or as with news platforms "open for everyone to comment", "open for registered users to comment" "open for adding of links" etc.

Ten years ago mobile phone operators wanted to provide all services to their subscribers themselves and the place to download games and ringtones was theirs. After only 8 months of operations the number of iPhone applications surpassed Windows mobile applications that had been developed for 9 years. Before the year end the iPhone app store is believed to have more than 100 000 applications, still the iPhone app store has only been semi-open and perhaps we will see an even faster development for the Google Android platform.

Actors playing multiple roles
Subdividing the value creation into smaller parts that can be independently created enables companies to focus on their core activities based on their core assets and capabilities, and use external actors to develop and provide the rest that is needed. In many cases this creates complex relationships where actors together build platforms or ecosystems of products and services, at the same time competing with their products and services. One example is Microsoft that provides the Windows platform for others to develop applications on, at the same time it competes in several application areas such as browsers and media players. Together Microsoft and external developers might compete against Apple's or Google's platforms and software applications. In technology and licensing intensive industries such as telecom each actor can any day be a supplier, buyer, competitor, partner and licensee.

Designing the value network
A key challenge for companies providing products as platforms is to design the value network surrounding the company and its value propositions. What role should the platform provider have in relation to external actors? With whom should you cooperate, how and under what terms? What are the external actors' incentives or disincentives to get a successful product platform to emerge? How do they look at your role in their business model? What are your value propositions towards the different actors that you need in your value network? How do your value propositions support customers' customers, suppliers' suppliers and partners' partners? What about your long term position in the value network?

Need for business model innovation
Think of all products that can be seen as platforms still controlled by one company where the speed of development could increase dramatically together with the available options for customers to customize and personalize the final product. This is not as much an engineering challenge as it is a business model challenge.

What products and services can be built and provided by others as add-ons to your platform product? What companies or other organizations make money or get benefits today based on your products and services? How could this be taken one step further...?

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  1. An excellent article! On platforms aro huge potetial for business model design and innovations. Dani