What are software platforms?
Software platforms have a unique lifecycle which charts their evolution and growth. Network effects, multi-sidedness, governance, and architecture separate platforms from stand-alone products and play a key role in determining platform success.
Platform Ecosystems describes the dynamics that govern platform evolution and how its applications contribute to its growth. Platform management strategies must be selected based on the phase of the platform’s lifecycle. Unlike stand-alone products, software platform architecture provides not only a functional blueprint, but also serves as the framework for managing platform growth and ecosystem participants. Governance and architecture of platforms go hand-in-hand and must be designed in alignment.
“Emergent innovation can only be facilitated, not planned by a platform owner” because so many benefits and new capabilities arise out of self-interested participants working towards their own goals. There are several specific challenges to growth and adoption that software platforms face which are related to bringing both sides of the platform together in the right volume at the right time.
Software platform ecosystems must be orchestrated rather than managed. This is because their strength is the diversity of external innovators; but their work must also be integrated with the platform if the advantages of this diversity are to be realized in practice.
The lifecycle of a product platform can be described by three vectors: the way in which the dominant platform design emerges in the market; the progression of the platform through the technology maturity curve; and the adoption of the platform by end-users.
In the beginning stage of platform markets many firms experiment with many features, capabilities, and designs. Many entrants attempt to satisfy market needs with a large variety of solutions. Eventually, a single option is selected and becomes the dominant design. A shakeout occurs and many competitors exit the market, voluntarily or involuntarily. Tiwana provides the iPhone as an example of a product which defined the attributes for the smart phone market: touch-screen; email, browser, text messaging applications; form factor; capability to receive software and application upgrades; virtual keyboard. Once the dominant design has been tacitly accepted by technology providers, firms move into an optimization mode within the parameters of the dominant design. Dominant designs play an important role in platform markets because of network effects and value creation from application standardization.
Platforms move through four stages during their lifecycle: introduction, ascent, maturity, and decline. As products transition from maturity to decline, process improvement takes the place of product innovation. Ideally, a company will “jump the curve” and move from a declining technology to an early-stage technology. However, organizational inertia in the form of entrenched business models and denial of competitive entrants frequently results in the displacement of incumbent firms.
End-users adopt technologies in several phases: enthusiasts, early majority, early adopters, late majority, and laggards. Geoffrey Moore’s “chasm” lies between the initial 15% of users (enthusiasts, early majority) and the remaining 85%. Platform strategies and marketing approaches must be tailored to each technology diffusion lifecycle phase.
Platforms typically have a tipping point at which a critical mass of users is reached and network effects begin to take place.
A key characteristic of software platforms is that there are two (or more) distinct groups of stakeholders who are brought together to receive benefits from the platform. The two groups must interact together directly for the platform to be multi-sided. For example, credit card companies bring together cardholders and merchants; operating systems bring together end-users and application developers; and health maintenance organizations bring together physicians and patients. Some platforms may evolve to have three sides: Apple brings together end-users, application developers and advertisers.
A network effect is a benefit of a platform which increases with each additional participant that is added. A communications network like telephones, facebook, or LinkedIn are not very useful for the first few users, but as the number of people join grows, the value is almost exponential with each new member. Conversely, a negative network would result when adding more users leads to an undesirable outcome such as more cars on the freeway, more users on a wireless network, or more users vying for mayor on foursquare.
Network effects can also be characterized as same-side or cross-side. Same-side network effects occur when adding a new participant on one side of the platform benefits participants on the same side of the platform. Cross-side network effects come in to play when adding a new participant on one side of the platform benefits participants on the other side of the platform. A positive cross-side network effect would be an application developer adding a new application to platform which solves a problem or meets a need of users of the platform.
Some platforms support multihoming–allowing platform participants to interact with multiple, sometimes competing, platforms. For example, mobile developers can create apps for both iOS and Android platforms.
Unlike stand-alone products and services, platforms require a governance framework that specifies which decisions can be made by the platform owner and the application developer, the types of controls that the platform owner uses, and the business model.
Platform Market Guiding Principles
Tiwana identifies nine guiding principles that describe platform market dynamics. The first set is associated with the initial development of the platform:
- Red Queen Effect – As competitive platforms evolve, the pace required to maintain competitive parity increases.
- Chicken-or-egg Problem – Until there are sufficient participants on both sides of the platform, the two sides are hesitant to make the investment and join.
- Penguin problem – Some participants will be reluctant to join a platform if they believe others will not participate.
- Emergence – Benefits of a platform may arise out of individual innovation efforts by platform participants.
The second set relates to how the platform evolves and grows:
- Seesaw problem – Platforms must balance the autonomy of applications developers against the standardization and interoperability of the platform.
- Humpty Dumpty problem – Removing an application from a platform may cause re-integration problems in the future.
- Mirroring principle – Platform providers must ensure the organizational structure of the platform’s ecosystem matches its architecture
- Coevolution – Architecture and governance must evolve in tandem.
The final principle describes how people choose if given competing options:
- Goldilocks rule – When faced with three options, humans will most likely choose the middle one.