Product Strategy: Should you be building a platform?
November 2, 2010
Why building a platform might be the right product positioning for your company
I am reading a fascinating book: Invisible Engines: How Software Platforms Drive Innovation and Transform Industries. As the title suggests, the book researches the history of major technology platforms, such as Microsoft Windows, the Apple iPod and the Palm PDA and reviews how these platforms were created and evolved over time in terms of business model, technologies, pricing structures and participants. From these history lessons, a number of insights become clear that can be really instructive for both entrepreneurs looking for the next big idea, or management teams at an expansion stage company seeking rapid business growth strategies.
Here are the ideas I extracted from the book:
- Software platforms tend to arise incidentally. That is, a product is built with a single purpose first including a specific set of features that serve a specific set of customer. Next, it is expanded over time into a platform that supports other compatible third party products. The most common driver is the product’s success and pressure to grow. Therefore, fast growing companies with good line products are very well positioned to become platforms.
- The building time for software platforms is lessening, and the required platform ecosystems (third party vendors and partners that rely on the platform for business) are also evolving very quickly. For example, the personal computer as a platform required 20 years to really develop. Windows took 10 years to become a household name. On the other hand, in just 5 years Facebook has experienced much success, and Twitter evolved into an indispensable software platform in just over 3 years. This is a byproduct of rapid technical advances that are creating new, exciting products; agile development methods that help bring them on to market rapidly, and the general maturity of the consumer technology market.
- Software platforms have very distinct and relatively less-studied pricing mechanisms. Because they are mostly multi-sided, the traditional marginal cost/pricing analysis does not really apply here. Instead, pricing evolves over time due to a combination of strategic choice, market pressure, and advances in technologies. Typically, platform vendors who have tight reins on the market in some form (for example, Apple with their tight integration of hardware and software), tend to earn more profit, even though it might not be clear whether the dominance will be good for the platform in the long run.
So if you are building a new product or thinking about expanding your product line, consider the platform play. It opens up a lot of exciting possibilities, unknowns and challenges that might reward very richly.
Come back next week for more musing on the economics of software platforms.