Dilemmas of Platform Startups

DILEMMAS OF PLATFORM STARTUPS Joni Salminen D.Sc. (Econ.) [email protected] Marketing department, Turku School of Economics Abstract This paper explores the strategic problems of platform startups on the Internet: their identification and discovery of linkages between them form its contribution to the platform literature. The author argues that the chicken-and-egg problem cannot be solved solely with pricing in the online context – in fact, setting the price zero will result in a monetization dilemma, whereas drawing users from dominant platforms sets the startup vulnerable to their strategic behavior, a condition termed remora’s curse. To correctly approach strategic problems in the platform business, startup entrepreneurs should consider them holistically, carefully examining the linkages between strategic dilemmas and their solutions. Keywords: platforms, two-sided markets, startups, chicken-and-egg problem 1. Introduction 1.1 Research gap Approximately a decade ago, platforms began to receive the attention of scholars. Entering the vocabulary of economics, two-sided markets (Rochet & Tirole 2003) have become the focus of increased research interest in the field of industrial economics. The recent surge of platforms has been observed across industries, and businesses have swiftly adopted the platform strategy and terminology (Hagiu 2009). Eisenmann, Parker, and Van Alstyne (2011, 1272) found that “60 of the world’s 100 largest corporations earn at least half of their revenue from platform markets.” Related terms such as app marketplaces and ecosystem have gained popularity in other fields (see Jansen & Bloemendal 2013). Overall, the implications of two- sidedness have spread from economics to other disciplines such as information systems (Casey & Töyli 2012), strategic management (Economides & Katsamakas 2006), and marketing (Sawhney, Verona, & Prandelli 2005). However, much remains to be discovered, in particular regarding platform development (Piezunka 2011). These issues are more closely associated with the platform business model than generic business problems that apply across industries and firm sizes. Problems such as a lack of marketing, running out of funds, changes in the business environment or macro-economy, or management errors have been considered in the extant literature (e.g., Miller 1977; Gaskill, Van Auken, & Manning 1993; Lussier 1996; Dimitras, Zanakis, & Zopounidis 1996). Similarly, there are multiple studies dedicated to challenges faced by new ventures or startups (e.g., McCarthy et al. 1981; Zacharakis 1999; Honjo 2000; Azoulay & Shane 2001), and particularly in the online context (Han & Noh 1999; Cochran, Darrat, & Elkhal 2006). However, the strategic problems concerning platforms are less known. First, not much is known concerning platform-specific business problems beyond the chicken-and-egg dilemma. Despite some extensions to other strategic issues, the chicken-and-egg problem is perceived as the fundamental issue in platform business (Evans 2002; Rochet & Tirole 2003). However, as this study shows, there are other dilemmas which can be deemed equally important for platform firms. Second, the perspective taken in the platform literature often neglects the startup condition, mainly regarding the lack of resources or pricing power. This tradition can be seen to stem from Farrell and Saloner (1985) and Katz and Shapiro (1985), often cited by platform scholars, who focus on industry standards and “monoliths”, not startup firms. Exceptions in the more recent literature are Caillaud and Jullien (2003), Evans (2009a), Evans and Schmalensee (2010), and Mas and Radcliffe (2011) who consider the chicken-and-egg problem particularly from a startup/entrant perspective. However, when strategies for solving the chicken-and-egg problem focus on pricing (e.g., Caillaud & Jullien 2003) and advertising, they might not be effective for startups lacking the means to execute either. Third, most studies relating to the chicken-and-egg problem are theoretical. Mas and Radcliffe (2011) and Raivio and Luukkainen (2011) are exceptions as they approach the problem through an empirical case study. Curchod and Neysen's (2009) working paper is methodologically closest to this study as it also applies GT. Although theoretical and analytical works have intuitive appeal, empirical studies can help ground their concepts more firmly in the reality of platform business. Fourth, without closer examination on associated problems relating to its antecedents or arising from its potential solutions, the chicken-and-egg problem is typically treated as being isolated. Such a narrow focus concerns most other strategic problems in the platform literature. Strategy scholars such as Lyles and Howard (1988) discuss interrelatedness of strategic problems. Thus, a more holistic approach recognizing the linkages between strategic problems and their solutions is needed. Fifth, strategic solutions considered by the economist-dominated platform literature are narrow and focus mostly on pricing (Shy 2011). The importance of pricing in the online environment is negligible as de facto pricing of many online platforms approaches zero in terms of both access and usage fees (Teece 2010). Rochet and Tirole (2005), for example, make a case proving that a platform can offer negative pricing to one market side and remain profitable overall as a consequence of what Evans (2003) terms “internalizing the externalities” of platform coordination. However, if entry pricing is set at zero and the platform is still unable to attract users, what can be done? It seems that answering this question requires an answer not centered on pricing strategies. 1.2 Purpose and research questions This purpose of this study is to address some of the previously mentioned research gaps with appropriate research questions, and, in so doing, improve the chances of platform startups to identify and solve central strategic problems pertaining to the platform business model, thereby also increasing their chances of survival. The research problem can be formulated as the following research questions1: RQ 1: What strategic problems are encountered by early-stage online platforms? RQ 2: How can the problems be conceptualized as dilemmas? RQ 3: Are the dilemmas interrelated? If so, how? The research questions therefore relate to strategic problems of platform startups, which are conceptualized as dilemmas. The interrelations of these dilemmas are examined, and the study analyzes their potential solutions. Due to the aforementioned high failure rate, it is meaningful to conduct such a study that aims at improving the survival rate of platform startups by providing knowledge on potential challenges they are likely to face, and also offering a basis for solution building. By asking the first research question, the study extends beyond the chicken-and-egg problem, and shows that there is more depth and complexity in platform dilemmas than is generally considered in the literature. The study challenges the simplification of “getting both sides on board” as a solution (Evans 2002), and argues that even if this is accomplished, a platform does not necessarily fulfill the financial necessity of becoming profitable. The second research question deals with conceptualization. Conceptualization facilitates communication of strategic problems, their further use, and theory generation (Glaser 2002). Communication of novel concepts takes place both among practitioners and scholars, and is crucial for development of business practices. Instead of constantly reformulating the same problem, scholars and practitioners are 1 Note that, due to the inductive nature of the study, the precise questions were formulated after the analysis. Whatever their initial form, theoretical sampling of grounded theory tends to reshape research questions (Urquhart, Lehmann, & Myers 2010). able to identify the situation in other contexts, and therefore also consider general and particular solutions in their own context. When a theoretical concept has reached a state of general knowledge within a field, communication relating to the phenomenon becomes more efficient and advanced (Hunt 2002). Furthermore, the identification, conceptualization, and analysis of platform-specific strategic problems is a worthwhile research purpose because the formulation of strategic problems influences the solution process2 (Ackoff 1969; Lyles 1981). As pointed out by strategic management scholars, strategic issues are rarely isolated cases, and merit a wider perspective. By thoroughly understanding the problem and its associations, founders are able to elicit appropriate solutions (Lyles & Howard 1988). By careful conceptualization (i.e., naming and defining) of the strategic problems, this study raises the abstraction level and provides a deep insight on them. The importance of the research purpose can be shown in many ways. Generally, it is accepted that startup companies are important for the economy (Audretsch & Acs 1994): they create a large share of new jobs (Kane 2010), develop innovations to improve people’s lives (Almeida, Dokko, & Rosenkopf 2003), redeploy resources by creative destruction (Schumpeter 1961), fill gaps in customer needs, and tackle problems efficiently and relentlessly from new perspectives (Shepherd & Kuratko 2009). Therefore, a study aimed at improving the conditions upon which startups will thrive can be regarded as important for society as a whole, as well as entrepreneurs and managers of platform startups. 2. Methodology

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