Innovation Process in Transition (4) – 06.04.2014

1. Innovation Process in Transition (4) – 06.04.2014 Dr. Hans Schaffers Director of Research, Centre for Knowledge and Innovation Research (CKIR), Aalto School of Business E-mail: hans.schaffers@aalto.fi

2. Overview

3. Impact of sustaining and disruptive technological change Progress due to sustaining technologies (incumbent innovators) Product performance Performance demanded at the high end (most demanding) of the market Most demanding customer absorption Average customer Least demanding customer Progress due to sustaining technologies Performance demanded at the low end (least demanding) of the market Disruptive technological innovation Disruptive Ideas Time Technologies can progress faster than market demand is able to absorb

4. Dynamics of networks and positive feedback Network economy Network effects Value of products/services (positive externalities) Criticalmass “Winner takes all”:de-facto standard Positive feedback Disruptive technologies Role ofstandards Number of users or Availabilityof software or content Techologies Products Markets Number ofcomplementaryproducts Formation of dominantconsortium standard Innovation -/+ Lock-in Switchingcosts Standards may hinder further innovation and entry

5. Two types of network effects: direct and indirect Source: Messerschmitt, Networked Applications, Chapter 5, 1999

6. Network effects and strategies Conditions/drivers- economies of scale - incompatibility - absent standardisation - low demand for variety Network effects Positive feedback Generic strategies in network markets Trade-off Openness (cooperation) Control (conflict) Trade-off Trade-off Performance Compatibility Performance Compatibility Open Migration Controlledmigration Discontinuity Performanceplay Microsoft, Intel CD HP Nintendo, Palm

7. Generic strategies in network markets Under what circumstances should which strategies be chosen ?How to segment your strategy portfolio ?

8. Platform-based innovation strategies in network markets Dr. Hans Schaffers Director of Research, Centre for Knowledge and Innovation Research (CKIR), Aalto School of Business E-mail: hans.schaffers@aalto.fi

9. Software platforms are in the heart of ecosystems of mutually dependent communities • Windows • Videogames: Xbox • Ebay • Google • Linux • Apple iPhone • At their core: a software platform offering API’s • Support ecosystems consisting of mutually dependent communities of businesses and customers (MULTI-SIDED)

10. Cloudcomputing platform development

11. Platforms supportingmulti-sidedbusinesses Creditcard industry • Card users • Merchants to accept cards E-Bay, shoppingmalls • Sellers • Buyers Singles clubs • Men • Women Computing platforms • Developers • Users • Hardware makers • Content providers

12. Basiceconomics of multi-sidedmarkets Value creation by bringing together multiple, distinct groups of customers who need each other. Provide services to both users and developers and to hardware makers Pricing – differentiation, skewed pricing model between the sides. Differences among industries: • Operating systems (Apple, Microsoft): Application developers are favoured. They make their money from users • Video game console manufacturers (Xbox, PlayStation): they make money mainly from developers whereas game consoles remain relatively cheap priced Exploiting positive feedback (network effects) between applications and users, nurturing both sides • Windows platform (users – applications) • Other examples Playstation, Palm • Symbiotic relationship between software and hardware platforms. Microsoft: three-sided platform: users, applications, hardware dev.

13. Differences and similaritiescanbeobservedacrossbusinesses Skewed pricing models • Apple – Microsoft favor developers • Video console manufacturers let developers pay Relation between software and hardware platforms • Video console manufacturing: integration • Computing systems: horizontal layering Economics of software platforms may provide explanations • Path dependence in industry development (video consoles – PC’s) • Fundamental differences in economics of the businesses and markets Implications for business strategies to exploit multi-sided markets: openness or control, partnering, pricing strategies • Microsoft: partnering; Apple (iPod/iTunes): control

14. Insightssofar Software platforms empower many modern industries: digital music, mobile phones, on-line auctions, PCs, video games, web-based advertising, on-line searching Most software platforms are composed of modules that provide software services to other software programs. APIs provide application programmers access to these services. APIs enable platform developers to write code that can be used by application developers, reducing effort Software platforms provide services to stakeholder groups (users, developers, hardware makers) Businesses based on software platforms follow multisided strategies to harness positive feedbacks The design of software platforms and the business models they serve has important implications for the structure of industries based on computing infrastructures: modular architecture with different players specializing in different modules (computers, telecoms, automotive)

15. Multi-sided platforms, economic and strategiccharacteristics Twokeycharacteristics of platform technologies: • It is a product of the mind: software as informationgood • Inherentlymultisided: software platforms serve distinctgroupswho benefit fromhavingeachotheron the same platform. The developerusesAPIs to developresulting software and sell to userswiththoseAPIsontheircomputingdevices.

16. Software as informationgoods Inexhaustible; even: consumptionincreasesvalue to otherusers Costless to reproduce, fixedcosts high, marginalcosts low • To make money: needintellectualpropertyprotection • Installedon hardware Networkeffectsrelated to components • Indirect networkeffects: increase of the nr of users of one component -> makes component more valuable as complement to the othercomponents Example: Sony’sinternet-based game center forPlaystation 2 -> games supportedby the Internet service • Direct networkeffects: increase in nr of users of the applicationor platform makes the applicationor platform more usefulforeach user Economicimplications: IP protection, pricing, bundling

17. Software platforms as multi-sided platforms Shoppingmalls and software platforms have much in common • Software platform is available to developers and users • Developerlicenses software to the user, whothen runs the applicationon the platform • Both relyon services of the platform. Shoppingmall provides parking, restrooms etc. Software platforms make service availablethroughAPIs. Thiskeepscosts low fordevelopers and users • User pays to license the platform, developerget platform services for free, may even getsubsidized software tools

18. Economics and strategies of multi-sided platforms Pricing: considermarginalcosts, pricingsensitivity, butalsoconsiderwhichsidevalues the otherside more • Attractcustomerswhocanbe made available to the otherside Balancing the demands of the different sides, nurturing the sides Business models

19. Strategiesfortwo-sidedmarkets - openness Opennessrefers to twostrategic issues: • Number of sides to pursue (one, twoormultisided) • How to relate to competing platforms. Platforms mayseekincompatibility, compatibilityorsomesort of integration Number of sides to pursuemaydifferacrossproducts Incompatibilitywithrival platform lockscurrentcustomers and locks out competitors Thismayevolveinto a “winner takes all” market. Three factors determinewhether “tipping” occursornot: • Tippinglesslikelywhenstandardsmaysuccessfullycoexist • Tippinglesslikelyifagentscaneasilyuse multiple standards • Tipping more likelyif providers of complementarygoods are able to differentiatethemselvesafterpicking a platform

20. Strategiesfortwo-sidedmarkets - innovation Manybusinesses in two-sidedinnovationrelyoninnovation In platform markets, innovations are interdependent Allowing a largenumber of software developersencouragesincrementalinnovation Systemicinnovationmaybebetteraccomplishedby a relativelysmall set of companies (e.g. mobile operatingsystems)

21. Platform leaders strategies and dilemmas Examples of platform leaders: Intel, Microsoft, Cisco, Apple Driving the evolution of the platform basedonmodulararchitecturewithplayersspecializing in different modules Normallyfirmswouldcontroltheirinnovationbycontrollingkeysuppliers, building strongbrands, acquire patents as barriers to entry -> controlstrategy Platform leaders and complementaryinnovators to cooperate, to increase the size of the marketforeveryone -> cooperationstrategy Platform leaders interest is to stimulate and channel innovationoncomplementaryproducts (networkeffects) As platforms are made of componentswhoseinteractions are built aroundstandard interfaces, standardsstrategies are critical

22. Intel’sarchitecturalchanges Intel realizedthatPC’s performance dependson the links between the components. Decided to change the architecture of the PC system bychanging the PCI bus design. Convincedotherplayers to adopt the new design. Later onotherchangespushing open platforms, such as USB initiative.

23. IBM’s open systems IBM realized platform shift in the 80’s, cededcontrol over keyelements (operating system, microprocessor) to Microsoft and Intel. Endorsed open systems (Linux, Java, Internet, Cloud). Rebuilt the companyaround services and middleware. Importance of distinctivecapabilitieskeepingitlinked to customers

24. JVC and Sony JVC (VHS) was more successful in creatinganecosystem of partners around the VHS home-video recorder technology platform Itcouldnot continue that to otherproducts Sony later ondidbetter in the Playstation platform and Blueray (DVD), butcouldnot move fromstandaloneinto the networkingtechnologies Platform leaders must prepare for the future even whenfocused and successful

25. Google Initially the search engine, its platform was the Internet Downloadable and free toolbar accelerates critical mass Built Internet portal to surround the search engine Android operating system and Chrome browser to facilitate mobile computing, search, advertising Acquired Motorola’s mobile business Broad view on platforms and business models (free and open) making it difficult for companies that charge for technology and lack advertising income

26. Microsoft - Apple Microsoft – limitedits scope to Windows and reluctant to cannibalizethis business. Butmovinggraduallyintoother areas Always had potential to competewith software and even hardware complementors Developed close relations with hardware vendors to bundle Microsoft applicationswith Windows intotheirPCs Apple: user interface design, product innovation are basis forsuccesswith iPod, iPhone, iTunes, iPad and transformationinto a global platform leader on multiple integrateddevices

27. Example: Facebook as multi-sided industry

28. Recent example: Platforms developedwithin the Future Internet Public Private Partnership A true open innovation ecosystem Open StandardPlatform

29. Platform offeredby the FI-PPP Fi-WARE refers to the technology that application developers can use to build Future Internet applications. FI-OPS provides the tools that FI-WARE instance providers can use to operate and run effectively their FI-WARE instances, e.g FI-LAB.  Main target audience for FI-OPS are the platform providers.  FI-LAB is a FI-WARE instance deployed over a number of datacenter nodes distributed and federated across Europe. It is an example where FI-WARE and FI-OPS are put at work, allowing large scale apps and services testing/trialing.   

30. FI-LAB: going beyond technology, the “meeting point” where a new Open Innovation ecosystem will be boosted Application sponsors (business, cities, etc) • Connect to entrepreneurs • Put their data at work • Visibility, promotion • Costs saving • Better service to customers • Corporate Reputation Entrepreneurs, Developers • Ability to test with real data • Ability to run trials with real users • Visibility, promotion • Hosting of permanent showcase • Connection to potential customers • Acceleration of product development • 4,2 M€ promotion campaign • Campus Party events • Startup Weekend events • Chambers of Commerce • 870 K€ in prizes • 100 M€ of funding devoted to entrepreneurs in phase 3 of the FI-PPP FI-WARE Technology Providers • Added value to just the technology • Connecting to entrepreneurs: Revenue-sharing opportunities

31. Questionsforgroupdiscussion Using the concepts of disruptive innovation, lock-in, positive feedback, network markets and platform strategy, discuss: Apple platforms and the media-content industry (iTunes/iPod) Facebook platform and social networks Implications of disruptive innovations for platform strategies Changing business models in different industries (similarities, differences)

32. ThankYou !Feedback welcomehans.schaffers@aalto.fi