Differentiated Platforms

Differentiation is a standard concept for analyzing competition. It describes a common situation, where one firm develops the ability to serve one type of customer in a market—say, buyers who will pay a lot to save time—while a competing firm serves another—say, budget-conscious buyers who are patient.

Differentiation can describe common competitive behavior in technology markets. A chip firm might develop particular attributes—say, faster, energy-hungry electronics for a particular purpose—while their rival might specialize in slower chips that use little energy. This differentiation can earn each firm loyalty from buyers with different preferences.

That motivates today’s question: Can platforms differentiate? Platforms have played an increasingly important role in technology markets in the last decade—in mobile devices, in web services, you name it. A mix of standards composes a platform, complementing many other firms who build services upon the standards.

At first blush the answer appears to be yes. Think of attributes associated with common platforms, such as Windows, Android, Linux, Facebook, or the iPhone. These platforms differ from one another in the marketplace and set themselves apart from near rivals, in ways that earn the loyalty of particular users.

That first impression makes it worth a deeper look. There is more here than meets the eye, and smart firms shape their strategies with subtle thoughtfulness.

Not as predictable as it looks

Most discussions about differentiation distinguish between the horizontal and vertical traits of products. More vertical traits are always better for all users. Faster speeds are vertical, and so is quicker response time. In settings without prices, such as the early search-engine market a decade ago, competition reduced to a race for the highest quality. In settings with prices, such as broadband access, it is common to observe one supplier specializing in high-quality and high-price services, while another takes the low position. Either or both positions can be profitable, depending on what most users want.

More of a horizontal trait is not always better for everyone. Local geography in retailing can be horizontal traits, for example, as one person’s favorite location can be another’s inconvenience. In such settings, one retailer specializes in one locale, while another locates elsewhere. Again, user desires determine whether either or both types of suppliers can profit.

Does platform differentiation involve horizontal and vertical traits in these ways? Only partly so. One vertical feature, size, occasionally plays a dominant role. In many settings, platforms with more users attract more developers than platforms with fewer users, and more applications from developers attract more users. Thus, advantages in size can become self-reinforcing, and therefore become a point of differentiation, sometimes even an unassailable competitive advantage.

That explanation also hints at why differentiation in platform competition differs from its simpler cousin. Platforms can involve many constituents, including developers, advertisers, content owners, and other business partners. The interplay between constituents determines the tenor of the differentiated competition. A single vertical trait, such as size, can determine the behavior of every constituent on rare occasion.

Here is another way to see the point. Consider the difference between proprietary platforms and nonproprietary platforms. The leaders of proprietary platforms retain rights. The leader can withhold information and make rules about how developers interact with the support services. Nonproprietary platforms tend to differ and to have processes that do not restrict information use.

Competition between proprietary and nonproprietary platforms mattered for jump-starting Linux back in the day, and for other platforms of that vintage, such as Apache. Today’s clashes can involve more. For example, consider the iPhone/Android difference. The latter has a nonproprietary governance structure. Accordingly, many hardware designs use Android, because there is no restriction on use.

Yet, that is not an unalloyed good outcome. For some applications, the iPhone has a reputation for being easier to develop for than Android, due to the limited number of aspect ratios affiliated with the iPhone, iPad, and so on, while the Android platform comes in dozens of shapes. The maker of Angry Birds has loudly complained about this feature of the Android platform for some time. Fewer restrictions on developers, it turns out, has resulted in a confusing quilt of hardware.

That example also illustrates why the restrictiveness of proprietary systems also can take on new implications when set in differentiated competition. It’s well known that Google initially bought Android and invested in deploying it as a defensive move, to prevent any proprietary system (Windows or Apple) from dominating mobile devices. Google worried about being locked out of the ad-supported business. Think about the irony of that: A profit motive fuels the incentive to deploy an unrestricted platform.

Here’s another interesting way in which restrictiveness plays a role in competitive outcomes. The Apple approval process for new apps has a reputation for arbitrary decisions that can delay the launch of a service. In contrast, the Android platform has no process at all, which makes it easier to distribute applications. On first look that seems to suggest that less restrictiveness is a vertical trait favoring Android.

First looks are deceiving. Apple also controls iTunes, which reaches a huge audience. That audience hesitates to go anywhere else – in part, because the approval process keeps everything on iTunes clean, reliable, and within predictable bounds. In other words, the rules that developers dislike create a platform that users like.

Restrictiveness can also yield unpredictable results. For example, Apple’s requirement that it receive 30 percent of the revenue from any application sold on the iPhone has generated a range of clever application developer responses—to escape what many perceive to be an Apple tax. Some developers use subscriptions for their services and provide a free app, or simply charge more for other services and supplement with a free app. The key is to develop apps that enhance revenue opportunities off the smartphone.

Those examples all reinforce a broad point: the interplay between constituents shapes platform differentiation. It also means the usual intuition for competitive advantage has to adjust. You can see that confusion in analysis of platform competition for new online media—YouTube, Hulu, Apple TV, Google television, and so on. All the online platforms are trying to differentiate, but the content owners’ attempts to gain revenue through the exercise of copyright further shapes actions. It is no longer obvious how to generate the right features for a platform balancing all these partnerships. Analysts have not been able to predict winners and losers with any accuracy.

Multiple constituents

Platform differentiation also takes on an interesting new dimension because proprietary platforms inherit branding from the firms that lead them.

Occasionally, inherited history can be beneficial for a platform sponsor. Recently Apple has enjoyed that situation, particularly when they unveiled their iPhone and then their tablet. Under Steve Jobs, Apple had differentiated in a way to cultivate a positive reaction from a bunch of crazy-loyal buyers. Follow they did, so Apple cultivated sustainable competitive advantages by nurturing assets in one setting and moving them to a place where the buyers followed. Did one platform nurture later platforms, or is it all one big platform? I am not sure what to call it, but I can see that it works.

Most of the time, however, inherited history is little more than a drag (I think). Just ask any platform sponsor trying to recover from past missteps. Today Microsoft, Nokia, and Blackberry all face different versions of this challenge in smartphones.

Occasionally, firms can manage their way around the challenges posed by an inherited point of differentiation. An illustration arose during Intel’s Centrino launch. Although most CEOs would have killed to have their brand in 1999, Intel’s management was smart enough to recognize that a good inheritance could have been a drag.

At the turn of the millennium, Intel’s brand stood for faster microchips. That was valuable in desktop computers, but inconsistent with Intel’s proposed design for wireless laptops. The proposal sacrificed speed for longer battery life, less heat, thinner designs, and embedded wireless capability. The management (correctly) believed that the proposed new platform inherited a misleading brand from years of Intel’s branding.

That was a dangerous situation for a multibillion-dollar platform launch. Slow initial sales could have posed a nightmare because the launch involved the cooperation of so many others—original equipment manufacturers, chipset makers, and a host of hotspot operators. Those partners had to make investments to help the entire platform succeed. The launch had to go well from the outset, or many business partners would withdraw their support. Branding could not stand in the way. It had to be right at the start.

Intel’s solution stressed a new brand name, Centrino, and a new education campaign, to market the change to potential buyers. Note the key point: Intel had to market a new platform that escaped the old, even though the old was pretty valuable in its old setting. It just did not match the new.

Where does that leave us? Platform competition has exploded in the last decade, and there is no end in sight to the interesting dynamics we should expect to see. Rarely will competitive outcomes between two platforms reduce to a simple comparison of one point of differentiation.

More to the point, the intuition from standard differentiated competition does not carry over without modification. Even the advantages affiliated with size, unrestrictive rules, and a good inheritance must be thought through.

Copyright held by IEEE. To view the original essay click here. 



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