Platforms and a visit to Japan

During the first week of December I visited Tokyo, Japan, and spoke about platforms. This was my first visit to Japan.  Accordingly, this post mixes commentary with a bit of travelogue.

Platforms are reconfigurable base of components on which participants build applications. Platforms have a long history in computing and electronics, with examples going back to IBM, Microsoft and Intel, among many others. Google and Apple are recent practitioners, and their prominence has renewed interest in platform strategies. It is, however, not entirely transparent to a non-expert how the (newer) discussions about platforms relates to the (familiar) analyses of standardization. My talk pointed out some of those links.

Background to set the scene: I stayed at Hitotsubashi University, a lovely campus in a residential neighborhood a train ride out from downtown Tokyo. I traveled there at the invitation of Professor Reiko Aoki, a professor at the university, and a member of an advisory group for the government on technology policy. She arranged for a presentation at the university, and another at the Research Institute for Economy Trade and Industry (REITI), a part of METI, the government agency with many experts in industrial policy. Professor Aoki and I both share an interest in standards. Sadao Nagaoka, also from Hitotsubashi and an expert in technology policy, provided commentary. We are pictured together at REITI at METI (at the top).

Platforms

Here is a link to the slides for the talk. Though I discussed platforms at both the university and at METI, attached is the latter set of slides because it is mildly more accessible.

That seemed more appropriate for METI. Why was that? The staff at REITI asked for it. They advised me to have examples in the talk, and fill it with accessible points. For this discussion about platforms I borrowed from similar to talks I recently have given at the FCC and at the Federal Reserve Board.

The talk motivated its themes with two recent examples, Wifi and Android. I picked these purposely. The former was designed by a standard setting organization (the IEEE), while the latter comes from a private firm (Google). On the surface they look quite different. Yet, both examples share similarities, in spite of differences in origins and in governance.

In each case, the platform helped grow the market after a lengthy unprofitable period of exploration by firms. In each case, the platform embeds multiple standards for interacting with applications, facilitating transactions between the various participants in the platform, and in each case there are various participants — application vendors, users, intellectual property holders, advertisers, and so on.

In this sense a platform is more than merely a new design or an endorsement of a bundle of standards. Related, successful platforms involve much more than merely designing a product.

Platform leaders much manage the flow of information to business partners, responding to their concerns, update plans in appropriate ways, and manage other aspects of the support process. In each case the standards and platforms continue to evolve after the design initially deployed. The markets for products and services around those platforms also evolve, typically building additional capabilities into the platform to satisfy the needs of users.

The talk ended with a number of observations about ways to understand the evolution of platform. For example, firms who aspire to be platforms leaders face considerable risks managing their costs and revenues. A large number of costs arise up front, while much of the revenue may arise much later, if it arises at all. Many firms aspire to become platform leaders, but many fail.

I focused on these issues because I guessed the audience would find them novel and useful. Looking at standards through the lens of platforms helps illuminate some of the processes that shape the evolution of markets and competition.

The talk ended with a focus on issues in competition policy. There is a concern in many countries about the early moments in a platform’s development, when it is possible for government’s to influence things because nothing has been settled. At such early moments, however, it is challenging for policy makers to assess whether platforms have created value, or whether the exploratory activity of firms has any chance of creating a commercially successful platform.

Here the talk discussed symptoms of a healthy competitive situation (e.g., whether entrepreneurs are present), and symptoms of a virtuous cycle (e.g., whether the participation of developers generates sales, which incents more developer involvement in a platform). In a healthy situation the justifications for any policy intervention are rather weak. In a less healthy situation policies can aim to create a setting where healthy competitive processes thrive.

Feel free to examine the slides for the details.

What kind of reactions did I get? It was respectful, to be sure, but also peppered with many good questions. Japan has a rather strong industrial manufacturing base, but one well suited to the last generation of technology in electronics. Many of Japan’s leading firms would like to make the leap to the next competitive era, keeping up with Chinese and US industries, but they are not sure how to do it. The game firms, such as Sony and Nintendo, have experience managing platforms, but the new sets of platforms differ in many ways, particularly in how they employ the Internet.

There is also a concern that platforms founded on open standards leads to commoditization for all participants. This is a valid question, to be sure, but it is easy to misunderstand. Examples suggest that differentiated firms can succeed in spite of standards if they have strong brands, distribution and other assets. More to the point, standards can create value through enabling interoperability, as in wifi’s case, which otherwise would have been unobtainable without any standard.

So, in general, there is general puzzlement about how to fit the new thinking about platforms into the existing strengths in Japanese industry. The audience at REITI at METI also asked about whether the existing regulatory approaches make sense for platforms.

Prosperity

Let me end with a few observations about Japan. Many of the traveler slogans ring true in person, but there is also so much more.

• By western standards Japanese behavioral norms are extraordinarily polite (at least with a foreigner in the room). It takes a bit of getting used to, and it leaves a visitor with the impression that something is not being said. Still, to be frank, it certainly leaves a better impression than many alternatives. It is a lot less infuriating than, say, a mouthful of New York insult, a whiff of Parisian snub, an evening of SoCal parochialism, or, what is nearly universal throughout the world, a sales person selling timeshares.

• The Tokyo train system exceeds every US urban transit system for speed, efficiency, and cleanliness. That said, the number of passengers that squeeze into a typical car make sardine boxes look like luxury accommodations.

• Tokyo is one of the world’s great cities. It is an enormous city, with staggering geographic range, and multiple neighborhoods – something on the same scale as the greater New York area. The high income and wealth also was evident – albeit not too ostentatious – in the automobiles and clothing of the denizens of the commercial and political districts, where I spent my time.

• Speaking of clothing, the financial and political districts of Tokyo took their sartorial direction from utilitarian norms. To an American eye it was more off-the-shelf Brooks Brothers and imitation leather, and not much customized Italian cut accompanied by Gucci and Prada. While not a surprise, it left me to wonder: does any major financial center of the world follow any other norm?

• As an interesting contrast, buildings in these districts had settled on more than a utilitarian norm, largely employing later generations of modern architecture. That meant they incorporated more appealing shapes – i.e., colors that blended with surroundings, less apparent exterior support structures, and more reflective glass. On the ground the public spaces in the commercial and political districts are often beautiful, albeit, a bit too bright at night for my taste. It is quite appealing as a collection, creating a very striking Tokyo skyline.

• Not far outside Tokyo is a very crippled nuclear power plant managed by an electrical utility whose management would like to avoid paying a price for its prior penny-wise-and-pound-foolish decision not to locate backup generators on high ground. For several thoughtful people (with whom I had conversations) this situation symbolized something deeply disturbing, since this outcome varied from the country’s norms, which prides itself on intelligently managed public services and public spaces.

• University campuses contain a universal rhythm to them. The scenes of students at Hotitsubashi could have been taken from anywhere. Students happily or somberly braved the rain, dressed sloppily in sweat pants and shirts, hair deliberately unkept in fashionable manners, with backpacks slung unthinkingly over slumped shoulders. The students walked around as their iPods ear-buds isolated them from noise, or spoke on cell phones, or engaged in high-pitched conversation with giggly friends.

• After feasting on the universalisms of business attire, cell phones, young adulthood, and architecture, I could not help but notice other universalisms of global commerce, namely, the ubiquity of Apple, Starbucks, McDonalds, Coca Cola and Disney. It is a bit absurd. Global citizens have only a few things in common beyond their iPods: off-the-rack pinstripes; a mouse with a nervous laugh; a multilayered sandwich comprised of ground beef, special sauce, and a sesame bun; and a propensity to drink a fizzy caffeine fix or an overpriced cup of coffee.

I do want to end on upbeat note. It was a great visit. Indeed, I cannot forget my first morning, the air clear and brisk after a rain. I walked to a Starbucks near the train station, the students walking in the other direction on their way to school. There I sat drinking a latte, trying to answer email on my smartphone’s browser, and I could not help but reflect on the short time interval between trains.