Executive Interviews: Interview with Marshall Van Alstyne on Emerging Markets
February 2008 - By Dr. Nagendra V Chowdary

Marshall Van Alstyne
Associate Professor at Boston University and research scholar at MIT.

that involves a new content format. Recent examples include

1. HD-DVD versus BluRay
2. Nintendo versus Wii versus Xbox, and
3. iTunes versus Zune

All of which each need content suppliers and content consumers.

An older example is Mac OS versus Windows. In each case, developers on one side of the market want to sell to the most consumers on the other side while consumers on the other side want the best supply of content.

• What are platforms and how do you manage them? How do successful platforms enjoy increasing returns to scale based on network effects?
  A business "platform" is a set of components used in common across a product family that also exhibits network effects. The platform is the foundation or infrastructure on which third party developers build further applications and add value. The platform sponsor, the one who owns the intellectual property and controls the technical specs, must carefully manage the ecosystem of downstream developers. Basically, managing the platformmeans coaxing developers to add lots of value in diverse ways, preventing them from competing too fiercely with one another, and not taking away their core value by folding their new ideas into the platform too quickly. Cisco, for example, has done a great job managing its platform ecosystem. They provide substantial support to anyone who wants to develop functionality on their switches. They rigorously prune the developer pool to maintain quality and reduce channel conflict. They also enforce an internal rule that they do not compete with their downstream developers until other competition for that feature has emerged. Developers then get to capture the majority of their innovation value while the Cisco platform value grows over time.

  "Network effects" are demand economies of scale that occur because a product becomes more valuable as other people use it. In two sided networks, the positive feedback loop created by successful matches drives more people and more value to that specific platform. In auctions, for example, buyers want to go where there are the most sellers, and sellers want to go where there are the most buyers. In computer games, players want the best choice of games while developers want access to the largest pool of gamers.

  Two-sided networks with strong network effects are very lucrative. And once established, the dominant players can be extremely difficult to dislodge. Imagine trying to topple eBay auctions or Microsoft Windows. It's not impossible but you will need to harness strong demand economies of scale and carefully plot your strategy.

• In what way do you think twosided networks differ from other offerings and what are the business implications?
  Product design, pricing, and business strategy all become much harder in two-sided networks than in traditionalmarkets, and all threemust be carefully coordinated.

  Product design becomes harder because you need to specifically engineer proprietary complementarity into your products in ways that drive one side of the market to the other side but only across your platform. Microsoft, for example, prefers that the best games run only on Xbox and not on competitors' platforms. HDTV is also a two-sided market—no one wanted to produce HDTV content until households bought enough HDTVS but no one wanted to buy HDTVs until developers produced enough content—which explains why the market took so long to develop. But HDTV is now a non-proprietary format. Once all HDTVs have the same functionality, then firms are forced to compete on price which drives down margins. Product design should be done to balance openness and proprietary complementarity while maintaining margins.

  Pricing is more difficult because establishing a platformrequires either that a firm subsidizes users to solve the chicken-and-egg adoption problem or it requires government intervention. Consider Adobe Portable Document Format (PDF). Initially, Adobe tried to sell both PDF readers and PDF writers but the pricing strategy failed. Who needed a reader for content that didn't exist but why would anyone create content for a reader that no one had? Adobe then decided to give away the reader which, in effect, hatched a chicken that laid a lot of valuable eggs. Since Adobe "owned" both sides via its proprietary format, it could also afford the subsidy. The story of TV illustrates both solutions. When color TV was first introduced in the US to a market full of black-and-white TVs, no one made any money for almost ten years. Then the largest manufacturer, RCA, decided to subsidize Disney's Wonderful World of color. This created a new demand for color TV in order to view the vivid new colors. But it was only possible because, as the dominant player, RCA could afford an enormous subsidy. RCA also won a battle to have its standard declared the national standard addressing the complementarity problem. Fifty years later, the identical problem confronted rollout of HDTV, but no one player had enough clout to subsidize adoption and stimulate demand. Because the market was more fragmented, the Federal Communications Commission (FCC) helped push laws through congress stating that by March 1, 2007 all TVs sold in the US must carry a digital tuner and by February 17, 2009 no TV station can continue to broadcast over-the-air analog signals. So pricing is trickier because you need to figure out how to subsidize a market without losing money or to get government help.

1. Emerging Markets Case Study
2. ICMR Case Collection
3. Case Study Volumes