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ICIM 2018 Capturing Value from Data Driven Online Platforms: Alliance Strategy of the Incumbents Junko Okayama Department of Innovation Research, Japan Science and Technology Agency, Tokyo, Japan, 1020076 (E-mail: [email protected]) Abstract Platform business is considered as a competitive business model. Especially, the emergence of “data driven online platformers” represented by GAFA (Google, Apple, Facebook and Amazon) is challenging various industries including the incumbent platformers. This paper aims to reveal the way for incumbent platformers to deal with the situation by cooperating with the “data driven online platformers”. As a result of case study, new hypothesis was derived. Leveraged by its data centric structure, the essential function of “data driven online platform (DDOP)” was identified as an ability to create new value by interconnecting users in different platforms which made the network effect more multifaceted. Incumbent platformers can benefit from this multifaceted network effect by promoting platform alliance with DDOP. Creating “new adjacent market” which is sandwiched by both platforms seems to be key success factor for incumbent platformers in this alliance where further discussion is needed. Keywords :online platform, platform alliance, multi-sided network effect, value creation 1 Introduction Platform businesses are considered as a competitive business model. Microprocessor of Intel, operating system of Microsoft Windows or video game console of Nintendo Switch and Sony PlayStation is a type of platform called “industry platform,” that is a foundation upon which an array of firms can develop complementary products, technologies or services (Gawer, 2009). “Industry platforms” are highly competitive business model since their value can be leveraged by external innovation of complementary products or services, referred as “platform leadership” (Cusumano and Gawer, 2002). Some of industry platforms have come out of closed platform which is a common base utilized by limited members. Another type of platform is called “transaction platform” which facilitate transactions between different markets represented by credit card or shopping mall. This type of platform has “two-sided (multi-sided) market” which leverages network-effect (both direct and indirect) and leads to Winner-Take-All dynamics after reaching the critical mass. (Eisenmann et.al., 2006) Today, incumbent platformers are facing considerable challenges of “data driven online platformers” represented by GAFA (Google, Apple, Facebook and Amazon). For example, Microsoft is facing challenge of Google. Since the device innovation and emergence of cloud computing is shifting the computing paradigm form on-premises PC software to mobile application services, Microsoft was forced to reshape their business model once established in the PC operating system and to re-create the competitive advantage in new business environment. Another case is the appearance of Apple's iPhone which totally changed the landscape of mobile phone market. According to (Van Alstyne et al, 2016), five major mobile-phone manufacturers collectively controlled 90% of the industry's global profits in 2007 but the situation has changed in a few years and iPhone generated 92% of global profits by 2015.”(Van Alstyne et al, 2016) Data driven online platformers seems to be gobbling the market of former incumbents by redesigning not only industrial but also societal landscape. How could incumbent platformers survive these circumstances? Is there a way for incumbent platformers to capture value form online platforms? 2 Literature Review 2.1 Online platforms Online platforms cover wide range of activities including online marketplaces, social media and creative content outlets, application distribution platforms, price comparison websites, platforms for the collaborative economy as well as online general search engines. (European Commission, 2016) It is said that online platforms inherit the characteristics of “industrial platform” and “transaction platform” at the same time which is referred as “hybrid model.” (OECD, 2016b) However, this is not enough to explain what online platforms are. Recent study of OECD reviled the existence of two user feedback loops named “data driven network effect.” One is “user feedback loop” which is an accumulation of user data enables to improve the quality of service and contribute to acquire new users. The other is “monetization feedback loop” utilizing the accumulated user data for monetizing by providing services such as ad targeting and invested to improve the quality of service to attract more users. (OECD, 2016a) Iansiti and Lakhani suggested that digital technology enable to spread value across the economy, but value capture is getting more skewed and concentrated which is explained as “digital domino effect.” (Iansiti & Lakhani, 2017) These effects, accompanied with a large customer base, act as barriers for new entrants. In this study, this type of platform is named as “data driven online platform (hereafter, DDOP)” and is defined as a “hybrid model” platform providing service based on processing and editing large amounts of data (European Commission, 2016) which were collected via internet. “Incumbent platform” is defined as a foundation upon which an array of organization (external firms and/or internal departments) can develop complementary products, technologies or services (Gawer, 2009) and is distinguished from DDOP. 2. 2 Platform alliance In the past studies, two types of platform alliance have been stated. One is "horizontal alliance," alliance of platforms which has similar function. These platforms can share their users or complementors and frequently is a strategy for weak platformers to beat the competitive platform. For example, in order to compete with NEC 98 series which was dominant in the Japanese PC market in early 1990s, Japan IBM promoted IBM DOS/V architecture in Japanese market successfully by sponsoring PC Open Architecture Developers' Group (OADG), a consortium of the major Japanese PC manufacturers to gain its market power. The other type is "cross industry alliance", an alliance of platforms with different products utilizing their users and complementors basis. For example, Google and Salesforce, providing web-based productivity application and CRM application respectively, collaborated in order to promote cloud-based enterprise service instead of on-premises software service provided by the incumbents such as Microsoft or IBM. (Negoro and Itoh, 2010) Recent study by Negoro and Takeda (2018) analyzed alliance between an incumbent platformer and a data driven online platformer. Here, an incumbent platformer, a credit card acquirer, permitted an EC payment agency, a startup company which became to be a DDOP later, to access their complementary market. After a time, the EC payment agency diverse their business and became a rival of the incumbent by providing real shop clearance service which is a major market for credit card acquirer. (Negoro and Takeda, 2018) 2.3 Research gap In the past studies of platform alliance, the cooperating platforms had been established based on similar technologies such as DOS/V architecture for PC or cloud-based application service. Studies covering alliance with different property such as product-based platform and DDOP is few, however this type of alliance were observed recently. Negoro and Takeda (2018) describes the relationship between incumbent platformer and data driven online platformer, however, this study could be interpreted as lose-win alliance and the way how to create win-win relationship is not clear. 3 Data and Methodology This research aims to introduce hypothesis by analyzing qualitative case study as described below. 3.1 Framework of case analysis First, the platform architecture of the case study was analyzed by using layer maps (Baldwin and Woodard, 2009) in order to identify the components which are operated across and/or separated between the two platforms. Then, the network effect across the platforms (i.e. player introduction) are analyzed in order to identify the synergy of platform alliance (Negoro and Itoh, 2010). Finally, common characteristics of the case studies are introduced. 3.2 Data The cases of platform alliance between an incumbent platformer (including closed platform) and a data driven online platformer, whose technology base are different, were studied. Two case studies in different kinds of industry segments were chosen. One is the case of game industry, the alliance of Nintendo and Niantic, a spin off company of Google which is famous for developing the smartphone application “Pokémon GO.” The other is the case of mine construction service industry, the alliance of Komatsu and GE. The data of the case studies are based on literature review and interview survey. 4 Cases 4.1 Case of Nintendo: Alliance with Niantic “Pokémon GO” Nintendo is an incumbent platformer in the video console market currently providing “Nintendo Switch.” The market is facing challenge of social game provided as freemium application of smartphones. Niantic is an DDOP established in 2015 invested by Google, Nintendo and The Pokémon Company. Niantic develops a social game based on “Real World Application Platform (RWA Platform)” which is a location-based service linked with planet-scale augmented reality and created their original game contents named “Ingress.” Pokémon GO is a smartphone game which Niantic released at July 2016 in cooperation with Nintendo and The Pokémon Company,
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