What competitive threats
(challenges) do you think platform
providers face from large companies
operating in adjacent markets that
have the ability to offer a
multiplatform bundle?
Watch out for platform providers in
adjacent markets that have two
properties. One their user base
overlaps your own. Two their user
base is larger than yours. If both
properties hold, then the adjacent
provider can offer your functionality
and fold it into their existing
platform. Once that happens, why
would their users pay extra to buy
your functionality when they already
have it on their platformand they can
connect with a larger network of
users? Why will your users stay if
they can switch to the other platform
and get more value? They have your
functionality but you don't have
theirs.
But note that this threat is also your
opportunity. Perhaps you have an
adjacent platform where your user
base is larger and also overlapping. In
that case, you can bundle the
functions of the smaller platform and
absorb their user base. Again, it's like
playing 3D chess where there are
threats and opportunities all around
you.
How should these challenges be
met?
There are a variety ofways tomeet the
threats posed by larger platforms in
adjacent markets. One is to develop a
new functionality that competing
platform will find hard to duplicate
and bundle so that your own offering
remains unique. Another is to build in switching costs that discourage
your users from jumping platforms.
A third is to transition business
models to secure new revenue
streams. And if the other platform
behaves too much like a monopoly, a
fourth strategy is to use antitrust law
to prevent the anticompetitive effects
of bundling.
Interestingly, RealAudio tried most of
these strategies when Microsoft
bundled its streaming media
products into the operating system.
Although they originally gave the
streaming media player away free to
users and charged content providers
like radio stations to reach users, after
Microsoft entered, they switched to
offering premium content and
charged users for access to this novel
content. They were also party to
successful antitrust suits in the US
and Europe. And, they survive today
by offering a premium music
subscription service.1
Would these challenges be
different in the case of emerging
markets?
Well, let's first be clear on what we
mean by "emergingmarkets." If by the
term we're talking about a region
where "politics matters as much as
economics" [a wikipedia
interpretation]my answer needs to be
different than if we're talking about
the rise of new user groups and the
adoption of new technology
platforms. Even in the world's largest
economy, Internet auctions were a
relatively recent "emerging market"
since eBay went public less than ten
years ago.
Focusing on the former
interpretation, let me be honest in
pointing out that my expertise is
information economics and not geopolitics; so speaking off-the-cuff,
I'd emphasize three things beyond the
obvious such as hiring the best talent.
These are being nimble, being
culturally aware, and being fair. If a
competitor has connections that you
don't, you could be in for nonbusiness
surprises as the rules of the
game can change underneath you. Be
ready to adapt quickly but more
specifically, I would invest in places
that have or will shortly have
regulatory transparency. Second,
being culturally aware matters. In
China, for example, the search
company Baidu claims there aremore
than two dozen ways to say the word
"I" so a Chinese sensitivity to
meaning matters. Third fairness
really matters.
In places where the rules change
constantly, one or another party will
often find themselves in a position to
exploit a worker, a supplier, or a
competitor. In the long run, that's a
bad idea. If rules change constantly,
sooner or later the roles reverse and
someone who has abused their
authority will have to answer for it.
But even if the rules don't change,
treating people fairly pays innovation
benefits. I'm working with a
colleague, Gavin Clarkson, who
specializes in Indian tribal law and
we've found that fairness increases
the willingness to invest effort and
willingness to share information.
Having more information creates the
option to innovate faster. This has
diverse applications from fairness in
employment contracting to fairness in
recognizing "traditional knowledge"
to fairness in designing intellectual
property regimes that do grant some
property rights but not rights that are
so all-or-nothing that they fail to
recognize value from other sources.
Returning to the second definition,
while viewing an emerging market as
the rise of new user groups and the
adoption of new technology
platforms, one should be aware that
two-sided networks behave very
differently when they emerge relative
to when they mature. Initially, you
must always solve the chicken-andegg
adoption problem. Why should
one side of the platform adopt your
standard when the other side hasn't
yet adopted it? You will need to
stimulate adoption and network
effects using the seed and subsidize
strategy mentioned above or by
seeking regulatory intervention.
Maturity, however, is a very different
matter. Once a two-sided network has
become so ubiquitous that it sets the
de facto standard for everyone and
there are no proprietary choke points,
then platform competition looks just
like any other standard industry
competition. Very few folks realize it
but the car market was once an
immature two-sided market.
