The Idea in Brief
If you listed the blockbuster offerings that have redefined the global business landscape, you’d find that many tie together two distinct groups of users. HMOs, for instance, link patients to health-care providers. Search engines join Web surfers and advertisers.
When successful, these platforms catalyze a virtuous cycle: More demand from one user group spurs more from the other. For example, the more video games developers (one user group) create for the Microsoft X-Box platform, the more players (the other user group) snap up the latest X-Box. Meanwhile, the more players who use X-Box, the more developers willing to pay Microsoft a licensing fee to produce new games. And as user bases grow, margins fatten.
But as Eisenmann, Parker, and Van Alstyne contend, managing platforms is tricky: Strategies that make traditional offerings successful won’t work in these two-sided markets. To capture the advantages that platforms promise, you must address three strategic challenges.
The key challenge? Get pricing right: “Subsidize” one user group while charging the other a premium for access to the subsidized group. Adobe’s Acrobat PDF market comprises document readers and writers. Readers pay nothing for Acrobat software. Document producers, who prize this 500-million-strong audience, pay $299.
If you seize a platform opportunity but don’t get it right the first time, someone else will. By mastering platforms’ unique strategic challenges, you’ll gain a head start over your competition.
The Idea in Practice
To ensure your platform’s success:
Get Pricing Right
Consider these pricing strategies:
- Subsidize quality- and price-sensitive users. For example, if PDF document readers were charged even a tiny amount, Adobe Acrobat Reader’s immense user base would be much smaller, reducing document producers’ interest and their willingness to pay a premium for access to readers. Readers, much more price sensitive than document producers, wouldn’t pay for access to a bigger base of writers.
- Secure “marquee” users’ exclusive participation in your platform. Providing incentives for marquee users (for instance, anchor stores in a mall) to participate exclusively in your platform (the mall) can attract more users from the other user group (retailers who lease space in malls with prestigious anchor stores). Result? Your platform’s growth accelerates.
Cope with Winner-Take-All Competition
The prospect of fat margins in two-sided markets can fuel an intense desire among rivals to become the only platform provider. To deal with the competition:
- Decide whether the two-sided market you’re eyeing will eventually be served by a single platform. The answer’s “Yes” if using more than one comparable platform would be costly to users and if special features don’t increase value to users.
Example:
The DVD industry meets these criteria: Owning multiple DVD players would be expensive for consumers; providing multiple formats, costly for movie studios. And DVD players don’t lend themselves to distinctive features, since they connect to TV sets that would negate any DVD player’s unique picture and sound capabilities.
- Decide whether to share the single platform or fight for proprietary control. Sharing has benefits: Total market size expands and rivalry lessens, reducing market outlays. That’s why DVD industry contenders opted to pool their technologies. They jointly created the DVD format in 1995, avoiding a replay of the costly video players’ VHS-Beta standards clash.
Want to fight for proprietary control? You’ll need deep pockets, a reputation for past prowess, and preexisting relationships with prospective users. When launching Acrobat, for instance, Adobe marketed to its existing user base for PostScript printing products.
Avoid Envelopment
Many platforms have overlapping user groups, tempting some related platform providers to swallow others’ users. Mobile phones, for instance, now incorporate music and video players, PCs, and credit cards. To avoid being swallowed, consider changing your business model. Example:
Under attack from Microsoft, RealNetworks (which pioneered streaming media software) ceded the streaming media business. It leveraged existing relationships with consumers and music companies to launch Rhapsody—a $10-per-month subscription music service that offers unlimited streaming to any PC from a library of a half-million songs. It now profits from consumers versus subsidizing them.
If you listed the blockbuster products and services that have redefined the global business landscape, you’d find that many of them tie together two distinct groups of users in a network. Case in point: What has been the most important innovation in financial services since World War II? Answer: almost certainly the credit card, which links consumers and merchants. Newspapers, HMOs, and computer operating systems also serve what economists call two-sided markets or two-sided networks. Newspapers, for instance, join subscribers and advertisers; HMOs link patients to a web of health care providers, and vice versa; operating systems connect computer users and application developers.
