Digital Firm - Lecture Summaries PDF

Lecture 1 Digital dominance - big tech companies seizing power Big tech companies have served as the topic of debate over the past decade or so – where on one hand we see its amazing capability to provide services to users worldwide at minimal cost and speed, while on the other hand seeing the mono...

Lecture 1 Digital dominance - big tech companies seizing power Big tech companies have served as the topic of debate over the past decade or so – where on one hand we see its amazing capability to provide services to users worldwide at minimal cost and speed, while on the other hand seeing the monopolistic effect these firms have on the market. In terms of market dominance, American platforms such as apple, Microsoft and amazon take the lead, closely followed by Chinese platforms such as Alibaba and TenCent. While these companies have a convergence of services, the main source of income and essence of a company comes from its core operation. Problem of bigness Louis Brandeis – popularly known as the Robin Hood of Law – was a strong advocate against the monopolisation of the market which he did through his article called “The Curse of Bigness”. This was further analysed by Tim Wu through his book under the same name. Recent concerns about monopolisation of these big techs big techs can be summarised through the following: 1. They now serve as “regulatory structures” by dictating the terms of interactions facilitated by them and shape the behaviour of consumers specifically through systemic collection, algorithm processing and monetisation of user data. 2. The capacity that these firms have, to profit off the new resource of big data, allows these corporate giants to position themselves above the market economy. 3. The UN conference on Trade and Development states that property rights, first mover advantage and uncompetitive practices, combined with digitised user data allows these firms to expand on a feedback driven ecosystem 4. Social media deploys the term of “platform” to make them appear to be a neutral, open and egalitarian facilitator to downplay their own firms. E.g., Uber markets itself as a technological firm, not a taxi company. This allows firms to neutralise themselves in front of the government in times of lawsuits and conflicts. 5. Firms that use large user data to facilitate their businesses and thrive in monopolistic practices gained the attention of multiple regulators. This led to countries such as china drafting a new set of antitrust rules over concerns that financial flows were moving away from traditional banks and into unregulated digital spheres. Professor Scott Galloway of NYU also wrote a book titled “The Four”, that examines tax evasion, invasion of privacy and subsequent effects of such firms on the job market. The rise of big tech firms can be summarised through a short three-step transition: 1. Installation of computers and development of software 2. Applications and business models are made 3. Big bang/turning point 1990’s-2000’s; thousands of firms introduced internet firms with many going into bankruptcy, however the ones that survived evolved into the big techs. Platformisation It is the penetration of infrastructure, economy and governmental frameworks of digital platforms in different economic sectors and spheres. Essentially, societies are organised as if they were platforms and collected user data is used to create personalised services. Three dimensions of platformization: 1. Datafication: collection and processing data with the help of AI techniques including demographic and behavioural data. 2. Reorganisation of market relations 3. Governance regarding consumers and complements The digital footprints that are collected can be further assetized and marketed through: 1. Datafication: Transforming social action and quantified data for real-time tracking and data analysis, thus allowing for optimal usage. 2. Commodification: this collected data is commercialised and becomes an asset to the firm. This also orchestrates a way for firms to turn personalised data that may not be available in the market, into a commodity that can be bought and sold. 3. Selection: this refers to the process where bulk data is filtered through, with the help of automated processes, to retain relevant information. Big tech companies have become infrastructural core of our society; they are required to facilitate any form of interaction. The scale of the company within the market determines the infrastructural power they have. -> Another determining factor is the scope of the platform i.e., the range of services they offer. E.g., Facebook retains a rather narrow scope of usage whereas amazon caters to a significantly larger number of services. Example WeChat- also termed as the super app or “app of everything’. In 2019, they reached a total of 1 billion users. This further lead to the launch of WeChat pay, alongside Alipay which together became two of the de facto mobile payment system standards. They thus expanded their scope by widening their range of services. Due to the rapid growth in its popularity, WeChat works in close cooperation with the Chinese state and law, which works under strong censorship and interception protocols. The parent company is obliged to share data with the Chinese government under Internet Security law and National Intelligence Law. WeChat can access text messages, contact books and location histories of its users, thereby allowing the government to conduct mass surveillance through it. Digital Colonization in High Regulatory Industries So far, digital platforms were mainly active in contestable markets (Cowan and Tabarrok, 2016) Recently, digital platforms started to invade also High Regulatory Industries (HRI), which are characterized by high entry barriers, high operational and compliance costs, state intervention and government actors. Digital colonization occurs in four phases: Phase 1: provision of data infrastructure services to regulated incumbents; Phase 2:data capture in the highly regulated industry; Phase 3: provision of data-driven insights; Phase 4: design and commercialization of new products and services. How traditional firms have become digital firms The digital revolution required traditional firms to adapt towards a more digital approach, which fundamentally changed the nature of most firms in the following ways: 1. Scale and scope – how firms are organised and managed 2. Shift from vertically integrated corporations into specialised firms that link buyers and sellers also known as digital platforms  3. Intellectual property rules- access to information is given a larger priority over ownership and licensing 4. Measurement and audit of firms – digital products are intangible commodities, thus making it harder to measure its value 5. Competition policy 6. Labor laws Digital shift depends on the nature of your business and won’t be adopted universally Most important factors: Usefulness and Ease of use – E.g., features such as facial and voice recognition are user friendly, making it a largely favourable choice by the public Technological advancement Low prices Moore’s law Computing power is said to increase every 18 months, allowing for rapid technological advancements, however equally important is the fall in prices, thus making these features largely affordable by the public and allowing for optimal use. Technology’s impact on the nature of the firm 1. Digital technologies lower transaction costs and turn firms into digital platforms 2. Digital democratization of content production: This feature gives rise to user generated content and app development opportunities, thus giving rise to the concept of an inverted firm. Essentially this entails shifting production from inside the company to its users and partners, while still profiting off it. 3. AI based datafication: improves prediction, personalisation and matching. Two faces of platform – firm or market? The uniqueness of a platform is that it combines characteristics of a traditional organisation (hierarchy, planning and coordinating) and markets (regulating to match supply and demand), making it a perfect mix of both concepts. Platforms focus more on building an infrastructure and grow networked markets instead of production. E.g., amazon plays a double role, it is a marketplace for sellers while also selling its own products Rahman and Thelen This article mainly focuses on discussing how the nature of capitalism is changing, focusing more on its political-economic context rather than technology or market origins. The evolution of a firm concisely consists of three types of firms namely – NNR, NOC and PF. NOC, or network of contracts, is essentially an agreement in the form of a contract where services required to be provided by the supplier are outlined as well as the costs to be paid by the customer for a minimum period. These firms concentrate on their core competencies and value-added segments, while outsourcing everything else. – e.g.: Nike (Nikefication); core activity is marketing and strategy in this case, marketing and the rest of the activities are outsourced. Platforms on the other hand while including relevant aspects of a traditional firm, differ in their importance towards digital technologies, patient capital, infrastructural power and focus on consumer interest. Comparison of two papers Birkinshaw – takes a technological deterministic view and emphasises that digital technology is the all-empowering force of change. Rahman and Thelen – Takes the stand that while technology is essential, the institutional landscape also holds a strong significance in the transformation of firms and the market. Important aspects of financialization, fissurization and differences between US and European political-economic landscapes are discussed. Internet safe harbor for digital platforms Here we discuss the inside out strategy. In 1996 Section 230 of the Communications Decency Act passed into American law, thereby removing the liability from firms for online services. This allows internet intermediaries to be protected from content published by third-parties and being responsible for that content. Permissive economic landscape A country’s political economic landscape can be permissive by: Absence of facilitating institutions Highly fragmented regulatory infrastructure may inhibit swift coordination and response rates. This could also give rise to regulation variations across states and cities. Platform-consumer alliance – presence This serves as the strongest source of platform power. They provide consumers with a high quality of service with low prices in exchange for private data. However, this gives rise to a privacy paradox between customers who want high quality services, low prices and convenience vs. those who resist violation of privacy. This leads to big platforms and customers forming an alliance, often against government regulation. E.g., Facebook was selling private data for political purposes as stated under the Cambridge Analytica study. Certain users immediately unsubscribed while a large majority remain Facebook users. Here the consumer wins over the citizen. Gray zones and regulatory entrepreneurship – absence Institutional and regulation hasn’t yet adapted to digital platforms or haven’t been able to regulate them leading to legal gray zones. This gave rise to regulatory entrepreneurship where activities that have weak and unclear regulation is engaged in. these entrepreneurs strongly resist change in the law as it is undesirable to them. Financialization of business sector and patient capital – presence Financialization refers to the accrual of profit through financial channels instead of trade and commodity production. This gave a steady rise in venture patient capitalists, who look for long term investments that potentially deliver greater returns than those in the market. They accept certain loses in lieu of long- term profits as they believe these firms could become the foundational infrastructure of that sector. E.g., Amazon and Uber. Antitrust law US, China and Europe differ dramatically in this subject. In the 1970’s and 80’s – approach of antitrust changed drastically. Until then, the law focused on breaking up overly dominant firms so the government could control giant corporations in order to protect democracy and avoid anti-competitive behaviour. This moved to consumer welfare and price theory, where low prices became the ultimate metric to measure competition. 1. Predatory pricing – prices are extremely low when competitors enter the market so newcomers cannot go below these prices and are enabled by patient capital. Consumers however benefit from these free or low-priced services. E.g., Google. 2. Low price paradox- the benefit to consumers however creates a killing zone for competitors and create high entry barriers. E.g.: 3. Facebook was threatened by Instagram and bought the company, thereby eliminating competition. Regulators accepted this takeover due to vast differences in the companies. Lina Kahn – Amazon’s antitrust paradox This study puts an emphasis on the fact that current law focuses on consumer welfare, allowing big techs to become monopolies. She suggested that we go back to market shares and number of consumers of a company to be the metric for market power of a firm. Criticisms of this study included the fact that if companies like Amazon were targeted only because of its low prices, then we would resort back to hysterically high prices for everyone. These large firms also added billions of dollars into the US economy and brilliant innovations into retail and technology sectors. European digital strategy DMA – digital markets act – restricts big techs from abusing market power and allows new players to enter the market Big tech companies that meet certain criteria are deemed gatekeepers between business and citizens. What will be regulated? Side-loading: Gatekeepers must allow electronic devices using their operating systems to uninstall pre-installed software and allow for the installation of third-party equivalents. Gatekeepers are required to ensure effective interoperability of operating systems, hardware and software. Example: Google search and Google Chrome pre-installed in Google Android Example: preventing Apple to impose a 30% commission on all the transactions concluded via App store. Self-preferencing: When displaying goods and services to consumers, Gatekeepers need to apply transparent, fair and non-discriminatory ranking conditions. They are no longer allowed to treat their own goods and services more favourably than those of third parties that are using the gatekeeper platform to connect with consumers. Example: prohibit companies like Google for better displaying their own products results of Google search Example: imposing e-book publishers to apply their best conditions on the Amazon e-book market place. Advertising transparency: Gatekeepers are required to provide transparency on pricing and performance of advertising , fees and performance of the advertisements paid for by the business user. New rules on data: Gatekeepers are prohibited from combining personal data from end-users collected through their core platform with data acquired from other services offered by them or third parties unless the user has given specific consent. They will also be required to facilitate effective data portability for data generated through its core platform. Example: restricting Facebook to use the data obtained from its subsidiary WhatsApp. Lecture 2 Digital Firm and ‘Exponential Growth’ Emphasis on explaining exponential growth of digital firms. Core concepts are: (direct) network effects and standards. Main concepts: Different kinds of network effects and their strengths Network value and Methcalfe’s Law First mover advantage Winner-takes-all/Matthew effect The role of Standards Increasing returns, Network effects, network value, critical mass, first mover advantage, winner takes all, standards Case studies: HD DVD vs Blu-Ray Android vs IOS: the war Facebook conquering and defending market share Digital Firms are the drivers of Digital Transformation. Decreasing and Increasing Returns Law of Decreasing Returns states that if one factor of production is increased while others remain constant, the returns will relatively decrease after a certain point. Beyond some point the relative value of a resource diminishes. Law of Increasing Returns signifies that cost per unit of the marginal or additional output falls with the expansion of a network. As more and more units of the commodity are produced, the cost per unit goes on steadily falling. We can explain ‘exponential growth’ by Increasing returns: Information goods: cost and revenue structure Network effects: are the core of business models of digital firms DIGITAL GOODS Information as Digital Good Digital good is intangible good (= without a physical form) in a digital form, ○ e.g. software, e-books, music and film downloads, mobile apps, online games, e- tickets. Because of its digital form it can easily be manipulated, reproduced, distributed, shared edited, reversioned (and hacked!). Digital information goods are non-rival. Also called a semi-public good (non-rivaly condition). Public good is defined by two conditions: 1) non-rivalry; 2) non-excludability. Digital information good meets the non-rivalry condition but not the non-excludability condition. For this reason information is called a semi public good. Information as Experience Good Experience good is a product or service where product characteristics, such as quality or price, are difficult to observe in advance, but these characteristics can be ascertained upon consumption. You must experience it to value it. Alternative ways to judge the characteristics of an experience good: reputation of the source (Wall Street Journal, McKinsey, Scientist) recommendations, reviews Cost and revenue structure digital goods Implications: Ability to spread development costs over large output quantities since marginal costs are low Low or zero marginal costs very attractive to users, tricky for suppliers (e.g. illegal distribution of e-books) Marginal revenues are low per unit sold; this requires large number of ‘buyers’ to make profit Network effects make widespread use of information goods more valuable as more people use the products. NETWORK EFFECTS Definition network effect: in economics and business, a network effect exists if a consumer’s utility of using a product increases with the number of other consumers using the product (Birke, 2009). Definition network good: a good whose value to one consumer increases the more other consumers use the good (Cowen and Tabarrok, 2016), Methcalfe’s Law Robert Methcalfe (co-founder of Ethernet and founder of 3Com) pointed out that the value of a telephone network grows nonlinearly as the number of subscribers increases. Some lessons from Methcalfe’s Law: 1. Adoption of digital technologies takes times before network value > network costs; 2. Early adopters don’t benefit from network value; 3. A critical mass needs to be reached before network value is created. Doubts about Methcalfe’s Law Methcalfe suggests there is a kind of a math rule to approximate the network value. Biggest flaw in Methcalfe’s Law is that equal value of all connections is assumed (confusing network value with network connections). Two main ideas from network effects in late 1990s “Get big fast” and “get large or get lost” (reaching a critical mass) First mover advantage (FMA) ○ A market participant has first-mover advantage if he is the first entrant and gains a competitive advantage through control of resources. With this advantage, first- movers can be rewarded with huge profit margins and a monopoly-like status. (Wikipedia) Seducing new adopters/customers to adopt the new interactive technology to lock them in and creating an installed base of networked customers. What is needed: Critical mass strategies: Pricing strategy (e.g. low prices devices or tools); Focus first on small group of users (e.g. FB, one college campus at a time; Uber, one city at a time). Law of the Few (Gladwell, 2000). Focus on connecters (influencers) who bridge the chasm) Network effect-based strategies digital firms Digital goods require large user groups (installed base). Most important asset of digital firms. They need to create network effects. Want to be first in the market to achieve big market share (First Mover Advantage): get big fast! Reach the critical mass asap. They are operating in a contested market  Try to prevent consumers to switch to another network (lock-ins, switching costs) Strong network effects barriers for newcomers in the market HD DVD vs Blu-Ray case shows Indirect Network effects War of standard Winner take all when standard becomes dominant Types of Network Effects Direct network effects: increase of value depends number of users of network (e.g. telephone, fax) Indirect network effects: when increases of the use of a product or a service creates increased value for complementary goods resulting in the added value for the original product (e.g. cartridges for printers, games for game consoles, DvDs for DvD players, apps for smart phones). The role of Standards and network effects Standard are design features of a product / service: A set of technological specifications that can be adhered to by a producer, either tacitly, or in accord with some formal agreement, or in conformity with explicit regulatory authority (David and Greenstein, 1990) Open standards: e.g. internet protocol: TCP/IP Proprietary standards: e.g. Android vs IOS Paradox of Standards Standards create interoperable infrastructure for network goods Standards are one of the main characteristics of competition between network good suppliers Contestable Markets and Strategies based on network Contestable Market In a contestable market there is a constant threat of new entrants that are contesting the position of incumbent firms in the market. These markets are characterized by low entry and low exit costs. That’s why they are called ‘hit and run’ markets First Mover Advantage A market participant has first-mover advantage if it is the first entrant and gains a competitive advantage through control of resources. Second over Advantage A second-mover benefits from the first-mover by appealing to its existing customer base and using marketing strategies that have proof of success. Critical Mass strategy Pricing strategy, Focus first on small group of users (FB,Uber), Law of the Few (Gladwell, 2000). Winner Takes All Installed base of consumers, Lock-in, Switching Costs The First Mover is never safe in Contestable Market A market is contestable if a competitor could credibly enter and take away business from the incumbent. Contestability does not require that such entry actually occur, only that it can potentially occur. 1. Contestability of a market rises to the extent: 2. Fixed costs of market entry are low, relative to potential revenue. 3. There are few or no legal barriers to entry. 4. The incumbent has no unique, hard-to-replicate resource. 5. Consumers are open to the prospect of dealing with a new competitor. (Cowen and Tabarrok, 2016, p. 309) Second Mover Advantage 1) Customer Development. From an existing company or competitor, you can learn what customers want. A competitor with traction validates that the problem is worth solving and that customers view the solution as valuable. 2) Product Management. As a competitor goes to market, and if they’re smart, they will be testing and optimizing the product. By analyzing their product you can learn about what works best. This saves testing and optimization time. 3) Customer Acquisition. You can often learn about how companies acquire customers. Analyzing how the first mover acquires customers can guide your strategy. You can also learn from their sales messaging and copywriting. 4) Procurement. If it’s a new market, the marketing and sales your competitor does may help to educate customers of the value of your products and actually expand the market. In a market where customers have a high loyalty to an existing and inferior solution, the first mover may do the heavy lifting of getting customers to start thinking about switching. https://mfishbein.com/4-second-mover-advantages-why-competitive-markets-can/ Some conclusions on network effects Network effects are the core of business models of digital firms. History shows that they are not always well-understood (e.g. Dot.com bubble) Network effects are not magic, law or math but strategic choices to create network value on interactive networks Network effects create high barriers for competition Positive network effects can easily turn into negative network effects (e.g. MySpace) Lecture 3 Digital Platform Dynamics Emphasis on digital platforms as new organizational forms. Core concepts are: two-sided and multisided markets. Main related concepts: Same-side and cross-side network effects Economies of scale and scope Components of platform architecture Subsidy side and money side Multi-homing Chicken-egg problem What is a Digital Platform? A (open) participative infrastructure to consummate matches among users and facilitate the exchange of goods, services, or social currency, thereby enabling value creation for all participants. From one-sided to two- or multisided business Traditional economics taught that it is never profitable to sell products less that costs In one-sided business the main focus is on attracting customers and selling to them on profitable terms Multisided economics shows that even paying (subsidizing) some customers rather than charging them anything can be profitable Multisided platforms need to attract two or more types of customers by enabling them to interact with each other on attractive terms OpenTable = two-sided. Online restaurant reservation. Matching people who want to go for a diner with restaurants seeking to fill tables. Business models two- or multisided platforms  Complex coordination The business model should satisfy the needs of participants on all sides Need to achieve different critical masses on different sides Complex pricing structure. Relative pricing-changing prices influences demand on other sides. Dynamic pricing (Uber) Core activities of a platform: pull consumers/producers to platform, facilitate interaction, matching different sides Turbocharging matchmakers: using advanced technologies Turbocharging technologies Rise of new information and communication technologies(big data, AI, social media, mobile phones etc.) at low prices reduce transaction costs dramatically (searching, collaborating and development software, matching software etc.). Platforms can scale up easily and cheap. Participants can easily connect to platforms at low costs -> network effects. So, why talking about digital platforms? Digital platforms are disruptive in some industries transport, health, education, finance etc. Digital platforms will become the dominant organization form of the (digital) economy (Srnicek, 2017) (15) The list of fastest growing global brands is increasing dominated by platform business (Van Alstyne et al, 2016) (16) Survey among CEOs shows that 82% believe platforms will be the ‘glue’ that brings organizations together in the digital economy (techvision,2016) (17) The Internet as an open platform is not a sufficient condition for new markets and innovation. It requires new organizational forms (digital platforms) to benefit from it. When do platforms work well When scaling (network effects) are possible When intermediaries (brokers) play an important role in the market merchants, brokers, travel agencies, taxi agencies e.g. When many suppliers and consumers are in the market When there is an un- or underutilization of capacity When there are demand is highly volatile (peaks and troughs) When do platforms not work well When market is highly concentrated (e.g. in B2B-markets)  When markets are strongly regulated with very personalized services (legal advice, healthcare) Core components of a platform architecture More or less fixed architecture – economies of scale – mass operations (network effects) Complementary components – economies of scope – variety / innovation (indirect network effects) Interfaces (API = Application Programming Interface) Main characteristics of digital platforms Matchmaking between the two or multi-sides of the platform (subsidizing and monetizing) Audience building through network effects Providing tools and services, dynamic information Governance, rules, standards, access. What are the same-side network effects? Positive ○ Facebook - the more people connected, the more friends you can find. ○ Xbox - more players in a game, more players to play with. ○ Amazon - recommender systems created same-side network effects (big data network effect). Negative ○ more sellers more competition, e.g. Airbnb, HomeAway Cross-side (indirect) network effects: The platform’s value to any given user largely depends on the number of users on the network’s other side. Positive: more users in Park monkey, more park places to offer. Negative: more adverts in games, players will leave Chicken-Egg Problem and the ghost town problem How do you get one side to be interested in a platform until that other side exists? Building a critical mass on one side is not enough. How many advert companies would be interested in Google+? Seeding strategies for solving the chicken-egg problem Subsidize one side of the market Zigzag strategy: pushing participation on both sides to reach critical mass. E.g. Alibaba worked on getting Chinese suppliers and foreign buyers on board simultaneously. Two-step strategy: Though LinkedIn is a marketplace between recruiters and candidates, it is also a social network between user profiles. LinkedIn first developed this network function before any recruiters got involved. Select initially small segment (Facebook: on campus, Uber: city by city) Selling users on future value: Tinder first recruited female users and promised that male users will get in very soon. Monetizing and subsidizing Two-sided platforms have typically a subsidizing side and a monetizing side. Requires a careful balance. Examples of pricing, subsidizing and support Airbnb hosts are subsidized by paying professional photographers to take pictures of their lodges, private messaging system, by writing listings about lodging. To provide software developers with free Software Development Kits (SDKs) to develop apps in app marketplaces. Giving away goods. Good that have high marginal costs is often deadly (e.g. Internet bubble start-ups). Better is software, as it has zero marginal costs after fixed costs are recovered) Multi-homing and Switching Multi-homing: being present at multiple platforms at the same time. E.g. multiple email accounts, multiple social networks Single-homing: being present at only one platform at the same time Switching from one platform to another platform Note: there is often room for only a limited number of platforms in a particular domain Multi-homing and switching costs Multi-homing costs: refer to costs incurred by being present on more than one platform (remember password, updating profiles on more platforms etc.). Multi-homing cost are not switching costs. High multi-homing costs for app developers (e.g. Android and IOS) Multi-homing costs low for Uber and Lyft drivers and consumers. High multi-homing costs are beneficial for winners (strong network effects) in WTA- markets. Leads to market concentration. Risk of Disintermediation The risk when network members bypass a hub and connect directly. E.g. Homejoy – a platform that brings together people that seek house cleaners and people that offer house cleaning services. Once they are matched, they can make their own deal. E.g. Airbnb: once the lister and renter are matched they can negotiate on their own without involving the Airbnb platform (that’s why Airbnb doesn’t provide detailed address and contact information on its side) (Zhu and Lansiti, 2019) Multisided platforms  Development from single- to two- or multisided platform mostly not a result of master plan or strategy but of experiments and seizing opportunities. Some platforms are predominantly single- and a bit two-sided or multisided. ○ Adding more sides to a platform may increase the number of positive, indirect network effects. ○ It also creates a more complex business model. All sides have to be managed. Lecture 4: Digital Ecosystems Emphasis growth of digital ecosystems, espec. enveloping and complementors. Main concepts: Enveloping strategies (brief) Competition and collaboration on the platform (complementors) Coring the set of activities, a sponsor can use to identify or design an offering (a technology, a product, or a service) and make this offering fundamental to the platform. (Tan et al, 2015) Complex growth ecosystem Digital ecosystems not only grow in size but also in scope (variety) Combining resources, data, and customers around new business model; Competition and collaboration within ecosystem (e.g. BMW and Toyota, Amazon and third parties; Embedded ecosystem services (Spotify as a service offered by Sonos) Growth strategies Digital Ecosystems Envelopment Refers to one platform provider moving into another one’s market, combining its own functionality with the target’s, to form a multi-platform bundle. Platforms frequently have overlapping user bases, so it may be interesting to integrate these and provide a new bundled platform service. Envelopment is a special case of a bundling strategy. Enveloping strategies to build digital ecosystems Examples: eBay enveloped PayPal, Google added a pay service (Google Checkout), productivity software (Google Docs), web browser software (Chrome). Case Example: Microsoft (MS) enveloped RealNetworks (Real) Real was the dominant streaming media platform with 90% market share in 1998. Real developed the technology and operated as a two-sided market. MS integrated Windows Media Player (WMP) in Windows operating software. Real lost market-share very rapidly. Complementors The platform and its network of complementors that produce complements to enhance value of connected platform Data are collected, extracted, analyzed form multiple platforms within eco system Boundaries of a digital ecosystem are arbitrary Growth of complementors: According to a 2016 Gartner survey of CIOs, the typical CIO whose organization is participating in a digital ecosystem expects the number of partners to more than double over the next two years. Biggest challenge: integration in the ecosystem All those different digital services/platforms should seamlessly be integrated to create increasing returns. However, there are Friends and Foes on the platform. ○ Precarious relationship between platform owner and complementors. Often misuse of market power by platform owner Complementors and Platform Leadership The more innovation on complements (scope variety), the more value, the more users (network effects) Platform leadership is balancing act (giving selective access to complementors, avoid too many complementors (may lead to negative network effects) avoid conflicting interests, etc.). Four levers of platform leadership: 1. Firm scope: decision on which complements to make in-house 2. Technology design: degree of modularity and intellectual property (open versus closed) 3. Managing relationships with complementors 4. Internal organization Readings Remarks on readings Lecture 1 ILO paper: Economics of AI: present a rather general but interesting overview of impact of AI on economy. Don’t study Section 5. Policy page 18-26 Brynjolfsson and Syverson, AI and the Modern Productivity Paradox: discusses four possible explanations for AI Productivity Paradox. Answer: AI is general purpose technology. Takes times before you can measure impact and complementary (intangible assets) are needed to make AI effective. Remarks on readings Lecture 2. Cowen and Tabarrok; introduces network goods and how these are related to rise of monopolies and oligopolies. Explains why the best technology/products does not always win, switching costs. Contested Markets. Collaboration game and legal issues don’t need to be studied. Birke: most detailed on dynamics on network effects (and somewhat on standardization). Most dynamics are discussed during lecture. Don’t study equations (except Methcalfe’s Law). Remarks on two-sided markets are relevant for next lecture. Saylor – Understanding network effects – discusses basic notions of network effects. Saylor – Moore’s Law – gives more detailed, technical description of Moore’s Law. Is recommended to read. Not learning for the exam. Remarks on reading lecture 3.  Eisenmann et al (Strategies for two-sided markets): relevant article. Good introduction into dynamics two-sided markets. Pagani: discusses three organizational forms. Focus on multi-sided platforms. Distinction value creation and valua capturing. Case study of broadcasting industry. Concept of Control Points is not relevant for exam. Haigu: discusses four main strategic decisions for building multi-sided platforms: 1) how many sides; 2) platform design; 3) pricing structures; 4) governance rules Remarks on literature lecture 4. Zhu: review paper on platform owner entry. Motivations, impact and defense strategies of complementors Tan et al: case study on the use of information technology capabilities and the development of Alibaba. Three phases in the development of Alibaba towards multi- sided platform. For the exam: focus on section 4 (case Description) and section 5 (Discussion). Amazon Case Amazon Platform and Complementors Amazon needs to facilitate complementors on the platform. At the same time, complementors are competing with products of Amazon. Sometimes Amazon moves into product spaces of complementors. Competing with Complementors Distinguish between value creation (through complementors/third-party sellers) and value capturing Platform leader can misappropriate value created through engagement with complementors (“swimming with sharks”). Platform leaders can move into ‘product space’ of complementor Amazon’s platform is not just a neutral marketplace for third-party sellers. It uses this platform to compete with (enter product spaces) with products and services of third- party sellers. Strong lead. Amazon is interfering and moving into product spaces. Development Alibaba’s ecosystem Phase 1: Catering and unmet Need (1999-2004) ○ Alibaba provided IT support to collate, publish, promote products to SMEs on website  ○ Leveraging tech. infrastructure. Alipay (escrow service) and Trust pass (credit verification) Phase 2: Mitigating Threat of Envelopment by Baidu and Google (2005-2006) ○ Alibaba bought Yahoo China (search) – locking-in customers ○ Alibaba bought Koubei – online lifestyle portal – community building on platform Phase 3: Pursuing a digital Ecosystem (2007-present) ○ Organic, self-organizing platform ○ Alisoft 2007 – user friendly Web-based applications ○ Alimama 2007 – trading platform for online advertising Alibaba is supporting, with all kinds of tools, to make sure that those third parties (small firms) do their business on the Alibaba platform. Possible flaws threatening the digital ecosystem (near monopolies) People concern about their private data (fear of surveillance). People need to trade-off convenience, low process with giving up privacy. People don’t appreciate monopolies. What about non-digital world? (labor relations: Amazon, Uber) Anti-trust regulations (Trump: “Amazon has a huge anti-trust problem). What if advertisement will be blocked?