Platform Envelopment Thomas Eisenmann, Geoffrey Parker, Marshall Van Alstyne Revised, August 11, 2008 ABSTRACT Due to network effects and switching costs, platform providers often become entrenched. To dislodge them, entrants generally must offer revolutionary products. We explore a second path to platform leadership change that does not rely on Schumpeterian creative destruction: platform envelopment.
By leveraging common components and shared user relationships, one platform provider can move into another’s market, combining its own functionality with the target’s in a multi-platform bundle.Dominant firms otherwise sheltered from entry by standalone rivals may be vulnerable to an adjacent platform provider’s envelopment attack. We analyze conditions under which envelopment strategies are likely to succeed. Keywords: Platforms, network effects, bundling, two-sided markets, complements, convergence Platform-mediated networks encompass network users along with intermediaries who provide components and rules that facilit
...ate users’ interactions (Gawer & Cusumano, 2002; Rochet & Tirole, 2003; Eisenmann, Parker & Van Alstyne, 2006; Evans & Schmalensee, 2007).Examples are as diverse as video games, container shipping, credit cards, instant messaging, package delivery, web search, real estate brokerage, HMOs, shopping malls, DVDs, online dating services, travel reservation systems, stock exchanges, and barcodes.
Such businesses comprise a large and rapidly growing share of the global economy: ranked by market value, 60 of the world’s 100 largest corporations earn at least half of their revenue from platform-mediated networks (Eisenmann, 2007). Established platform intermediaries can be difficult to displace.They are sheltered by network effects (Farrell & Saloner, 1985; Katz & Shapiro, 1985; Economides, 1996), switching costs (Klemperer, 1987), and endogenous sunk costs for R&D, infrastructure, and marketing (Sutton, 1991). To dislodge entrenched intermediaries, standalone entrants—firms that compete in a single product market—generally mus
offer revolutionary products and services (Henderson & Clark, 1990; Bresnahan, 1999). For these reasons, Evans & Schmalensee (2001) observed that networked industries often evolve through sequential winner-take-all battles, with superior new platforms replacing old ones.
This paper explores a second path to platform leadership change that does not rely on Schumpeterian creative destruction: a phenomenon we call platform envelopment. Platform providers that serve different networked markets sometimes employ similar components and have overlapping user bases. We define platform envelopment as entry by one platform provider into another’s market, combining its own platform’s functionality with the target’s in a multi-platform bundle that leverages common components and/or shared user relationships.Dominant firms that otherwise are sheltered from entry by standalone rivals due to strong network effects and high switching costs may be vulnerable to an adjacent platform provider’s envelopment attack.
For example, Microsoft launched Windows Media Player (WMP) in 1998, enveloping RealNetwork’s dominant streaming media platform. RealNetworks (Real) served a two-sided network (Rochet & Tirole, 2003; Parker & Van Alstyne, 2005): consumers downloaded its media player for free and content companies paid for Real’s server software.Like Real, Microsoft freely supplied WMP to consumers, but Microsoft bundled its streaming media server software at no additional cost as a standard feature of Windows NT server—a multipurpose operating system that also incorporated file, print, mail, and web server software. Users found Microsoft’s bundles appealing and Real rapidly lost market share. We believe that envelopment is a widespread phenomenon and a powerful force shaping platform evolution.
While we do not offer statistical evidence of the incidence or impact of envelopment in this paper, we note that the phenomenon occurs in half of 28 case
studies in an MBA course on platform-mediated networks (Eisenmann, 2007). Examples include eBay’s acquisition of PayPal; UPS adding overnight air delivery to its long-haul trucking services to counter a threat from Federal Express; NTT DoCoMo’s move into mobile phone-based payment services; and LinkedIn adding job listings to its professional networking website to compete with Monster. com. Our analysis of
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