Shift 3: From a Focus on Customer Value to One on the Value of Ecosystems
Linear companies with traditional strategic models aim to maximise the lifetime value of individual customers of products and/or services. These customers are located at the end of the linear process — B2C. Platforms, on the contrary, want to maximise the total value of a growing network, whereby that network consists of users who supply a product or service on the one hand and users who consume that product or service on the other. The users can exchange roles or carry out various roles simultaneously. Eisenmann et al. (2006) suggest that because platforms have a different group of users on either side, the value creation shifts from left to right and from right to left. Users of Uber, for example, may take a taxi ride one day and be a taxi driver the next; travellers may stay the night at an Airbnb on one occasion but then host an Airbnb on another. This change in the value chain is an important feature of a two-sided market.
Amazon under Fire in Austria
Austrian retailers have lodged a complaint against Amazon with the federal competition authority. The retailers have highlighted the double role of the American webstore and the growing domination in the Austrian market. They want to eliminate ‘disruptive trade conditions’ and call for fair competition.
European Doubts about Amazon
The role of Amazon is under fire in other European markets as well. The European commission is investigating, for example, whether the webstore uses the data of retailers selling their products via the Amazon platform for its own personal gain (Het Financieele Dagblad, 10 December 2018, fd.nl/krant/2018/12/10).
Bibliography
Choudary, S. P. (2015). Platform Scale. Platform Thinking Labs.
Eisenmann, T. R., Parker, G., and Van Alstyne, M. W. (2006). Strategies for two sided markets. Harvard Business Review. Available at: SSRN: https://ssrn.com/abstract=2409276.
Chapter 2
The Development of the Network Economy: Opportunities and Threats
How Powerful are the New Platforms?
Facebook CEO, Mark Zuckerberg, had to defend himself in front of the American Congress. Facebook had not been keeping a close enough eye on the messages and advertisements on its platform. This enabled information and messages to be manipulated (fake news), possibly also during the American 2016 presidential election. Facebook’s use of data left behind by ‘friends’, which were analysed in order to allow for targeted advertising, also faced criticism. The fact that no one pays for Facebook led to questions about its business model: ‘4.3 billion dollars profit while users don’t pay?’
The older decision-makers and leaders showed considerable ignorance regarding the new platforms. Facebook has 3.5 billion users worldwide and is by far the largest social medium outside China. In China, WeChat is the largest with over 1 billion users, and the company is growing rapidly. This development is particularly spectacular because WeChat only started in 2011 while Facebook began in 2004. Thanks to all the contacts that a person accumulates, the unprecedented power of the market leader, Facebook, is immense. It is not easy to leave this platform because then you would ‘lose all your friends’ who do decide to stay on the platform (prisoner’s dilemma). Through this phenomenon, Facebook has all but acquired a monopoly whereby other social media can be no more than a niche player (such as Twitter, Instagram, part of Facebook, and LinkedIn, part of Microsoft).
Google also gets a great deal of criticism for its market position. As a search engine, it has almost a complete monopoly in Europe with a 95% market share. In the Netherlands, this is as much as 98.8% for the smartphone and 89.3% for the computer. This dominant position leads to irritation in the European Union and has resulted in a €2.4 billion fine. But is this dominant position of ‘Google Search’ not the fault of the European Union’s passive attitude? Google is also the market leader in the United States, but with a much lower market share of 63.5%, alongside the 24% market share of Microsoft and the 11.4% market share of Oath (formerly Yahoo). In the last 20 years, Europe has not developed any alternative to the new platforms and is trying through fines to slow down this development without offering any alternatives. Competing with Google Search is actually impossible due to its name recognition, the sophisticated algorithms and the many embedded applications.
The fine in 2017 (€2.4 billion) was all to do with the strength of the Google search engine coupled with the lack of competition. Google Shopping was always at the top of the search results. This was seen as Google abusing its dominant position. In 2018, it received another fine; this time €4.34 billion for making it compulsory for manufacturers of smartphones to install the Google search engine on the phone’s (Google) Android operating system. This made it impossible for other search engines to compete with Google Search. Apple has its own system (iOS) so this did not count. These are all signs of old regulations and an old vision on competition in a new world. Buyers and customers don’t mind this ‘monopoly’; they don’t pay for it and actually often find it convenient. The competition, however, is excluded, as they aren’t able to offer any additional value. Is this a taste of what competition will be like in the network economy? Or is it in fact a different sort of competition, the scope of which we are as yet not aware of? It is striking that there seems to be the illusion that customers don’t have enough choice due to the new dominant positions, while customers don’t experience it as such. After all, in the physical world the choice is limited and specific to location or country.
Uber and Airbnb also experience a great deal of opposition from the traditional suppliers and legislators. Uber is popular as a taxi business due to its good service, reliability and transparency, both in terms of price and route. Traditional taxi businesses, which work with licenses, feel threatened because customers prefer to use the Uber ride. Does it then not make sense that traditional taxi companies should also integrate these useful functionalities: an app, transparency, clear routes and automatic payments? The unwillingness to compete with the new entrants (Uber) is a typical response; ban the competition rather than adapt to change. However, considering the preference shown by customers, participating with the Uber concept is the only possibility for successful competition.
Airbnb is facing similar opposition. This hospitality platform where private individuals can offer lodgings to other individuals is now immensely popular due to its small scale, low costs and flexibility. Many tourists no longer want the luxury of a hotel but prefer a place to stay without all the bells and whistles. The popularity of Airbnb is leading to more tourists visiting popular cities such as New York, London, Amsterdam and Barcelona. But as the homes of private individuals are used for lodging, this also leads to resistance.
Limited legal restrictions can be appropriate at times; however, stringent regulations, or even bans, simply serve to resist the inevitable change. The resistance primarily comes from the strong lobby from hotels, which are seeing some of their profits disappear. But what we don’t see is a change in the business strategy in response to the wishes of the customers. This is even leading to Airbnb (probably) being banned in New York because hotels regard this as unfair competition. These tourists bring in money and help to stimulate employment and the economy. This leads to an extra financial impulse among private individuals