Chapter 10

How does the lecture define a platform business model?

A business model that creates value by facilitating interactions between two or more interdependent groups through a specific infrastructure and set of rules.

Leverage Backward Compatibility:

Designing new products so they still work with older systems, users, or complementary products, making it easier for people to switch without losing what they already have.

• Ex. Spotify lets users import their iTunes playlists, making it easy for Apple Music users to switch without losing their music library.

Incumbents: Close Off Rival Access and Constantly Innovate

Dominant firms protect their advantage by making it hard for competitors to connect to their products and by continuously improving them so rivals can't keep up.

• Ex. Apple frequently updates its software and limits compatibility with competing hardware, making it difficult for rivals to copy or work with its ecosystem.

The Osborne Effect/ Well-Known Followers: Preannouncements:

When a company announces a new product too early, causing customers to stop buying the current version and wait for the new one, leading to a drop in sales.

• Apple announced the Apple Watch months before its release, causing many customers and developers to delay choosing competing smartwatches.

Leverage Distribution Channels:

Using existing platforms or systems to get your product to users more easily and quickly, especially when direct adoption is hard.

• Ex. Meta launched Threads by linking it to Instagram (distribution channel), so users could sign in instantly and follow their existing network

  • Meta saw the opportunity from twitter failing

Seed the Market:

When a firm deliberately gives away or heavily subsidizes part of a product or service to jump-start adoption and build momentum in a network.

• Ex. Google provides its search engine for free, using ad revenue to support it, which helped quickly build a massive user base and made it the dominant search platform.

Alliances and Partnerships:

Firms collaborate to grow a network by sharing resources, users, or technology to compete more effectively.

• Uber’s competitors Lyft, Didi, Ola, and Grab formed partnerships to share tech and expand coverage, creating a stronger combined network to challenge Uber.

Envelopment:

When one market attempts to conquer a new market by making it a subset, component, or feature of its primary offering.

• Ex. ipod into iphone

Convergence:

When two or more markets, once considered distinctly separate, begin to offer features and capabilities.

• Ex. The markets for mobile phones and media players have converted (and smartphones won).

Subsidize Adoption

a strategy where companies give early users discounts, rebates, or free access to encourage them to join a new network. The goal is to build enough users so the product becomes more valuable and attracts even more users over time.

customer acquisition costs

The amount of money a firm spends to convince a customer to buy (or in the case of free products, try or use) a product or service.

Two Sided Market:

A platform that brings together two different groups of users. Value comes from the interaction between the groups, and each group's benefit depends on how many users are on the other side.

• Is related to network effects, example Youtuber and Viewers

• Social media would not be because we would be on the same side

What occurs when the value of a product or service increases as its user base grows?

Network effects.

According to the lecture, do most products currently on the market exhibit network effects?

No, most products are not subject to network effects.

What is the primary function of platforms regarding software products and complementary goods?

They allow for the development and integration of these products to create an ecosystem of value-added offerings.

Provide four examples of platform businesses cited in the source material.

YouTube, Uber, MasterCard, and Airbnb.

What are same-side network effects?

Benefits derived from the interaction among members on one side of a market.

• As more gamers join, there can be positive or negative effects for gamers

  • Pro: more connections less wait time

  • Con: more competition

What is the definition of cross-side network effects?

A situation where an increase in the number of users on one side of the market creates a rise in value for the other side.

• On YouTube as more youtubers join we have more content so its is a positive effect

  • Can also have negative effects as advertising could be increased

Which strategy did PayPal use to encourage the initial adoption of its products?

Subsidization (paying users $10 to sign up).

Which competitive strategy involves using multiple platforms for the same service, such as drivers working for both Didi and Lyft?

Multihoming.

Why would a firm choose to form an alliance in a network market?

To survive in competition against a dominant incumbent.

What was the purpose of Airbnb's friend referral program beyond just increasing users?

To enhance trust within the network.

Which strategy leverages current users to promote products to new potential users?

Viral Promotion.

• Shein referrals

How did Nintendo use 'Market Redefinition' with the introduction of the Wii?

They targeted non-traditional users, specifically seniors, who previously had no interest in gaming.

What is the goal of making a 'Preannouncement' roughly eight months before a product is ready to ship?

To cause potential adopters to 'sit on the fence' rather than purchasing a competitor's product.

Which strategy is exemplified by Microsoft adopting Google’s KML standard for its Bing Map service?

Rival Compatibility.

How does Amazon motivate developers to create complementary goods for its ecosystem?

By providing financial incentives, such as a $100 million fund for improving and providing new apps.

Why does Apple block competing third-party hardware from plugging into iTunes?

To use constant innovation to make it difficult for competitors to become compatible with their ecosystem.

What are the three primary value-adding sources in network effects?

Exchange, Staying Power, and Complementary Benefits.

In the context of network effects, what does 'Staying Power' represent?

The high switching costs users incur as the network size grows, making them less likely to leave.

Concept: Complementary Benefits

Definition: The increase in value a product gains as other products or services emerge around it. Example: Prime membership on Amazon or video games on YouTube.

How does higher participation in a two-sided market typically affect the value for users?

It leads to better matches between the two groups, increasing the overall exchange value.

What is technological leapfrogging?

Offering a new technology so superior to existing offerings that it overcomes the resistance of exchange, switching costs, and complementary benefits.

Which three factors must a new entrant's technological functionality overcome to beat an incumbent?

Exchange with current users, switching costs (staying power), and complementary products.

What are the three main activities Roblox allows its users to perform?

Create their own games, play games created by others, and socialize through in-game chat or virtual events.

Why do parents often feel better about children spending time on Roblox compared to other platforms?

Creating games on the platform involves learning to code.

How can Roblox users generate income within the platform?

By developing games or items other users want and selling them for Robux.

How can network effects actually encourage innovation among programmers?

Programmers are more willing to invest in learning to code for a dominant standard (like Windows or iOS) because their work can reach more users.

What blocked innovation in the early mobile market before dominant standards emerged?

Market fragmentation, requiring developers to create many versions of the same game for different carriers, hardware, and screen sizes.

A company launches a new console that is 10 times faster than the market leader but fails because there are no games available for it. Which value-adding source did they lack?

Complementary benefits.

Why is it difficult for a new social media platform to compete with an established one like LinkedIn?

The incumbent has high staying power due to the professional presence and switching costs users have already invested.

Which strategy is being used when a smartphone maker announces a new 'revolutionary' camera months before release to prevent users from switching to a rival?

Preannouncements.

If a platform provides a $100 million fund to help startups build apps for its operating system, it is pursuing the strategy of _____.

Complementarity.

Under what condition can a new entrant successfully beat a dominant platform incumbent?

When they offer technological functionality that is superior enough to overcome the total resistance of existing network effects.

Which term describes a user who simultaneously uses Uber and Lyft to find the fastest ride?

Multihoming user.

In a two-sided market, how does 'Exchange' create value?

By facilitating communication and transactions between users and partners, which becomes harder for rivals to match as the network grows.

What is the primary difference between one-sided and two-sided markets regarding value creation?

One-sided markets derive value from a single group of users, while two-sided markets require two distinct participant categories to deliver value for each other.

Why do network effects create a 'winner-take-all' environment?

The dominant standard limits competition because users and developers gravitate toward the largest network to maximize value and minimize costs.