Uber Mathematics 5

Continuing a series of posts on Uber's business model.  Much of this material also applies to Lyft and other similar operations. For previous posts, see https://rvsoapbox.blogspot.com/search/label/Uber

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Another thing about Uber is that it operates as a two-sided platform, matching passengers with drivers. Two-sided platforms can only operate successfully if there is sufficient demand on both sides - people looking for rides, drivers looking for work.

As I noted in an earlier post, Uber might initially have been able to recruit more drivers than it needed, in order to provide a high quality of service to its customers. Many people may have signed up as drivers based on unrealistic estimates of the likely earnings, costs and overheads, but obviously this is not sustainable for long.

So if Uber's pricing model can't pay the drivers enough to make the job worth doing, who would be surprised that Uber is now facing a shortage of drivers? While Uber customers experience increasing prices and worsening service levels.

So after years of what they regarded as unfair competition, traditional taxi services are now returning to popularity in large cities such as London (black) and New York (yellow).

But this has also resulted in an excess of demand over supply. In recent years, traditional cab driving has been hit by a triple whammy - competition from Uber et al, environmental regulations forcing older polluting vehicles off the road, and of course the COVID pandemic forcing many potential passengers to stay at home. So there is now a shortage of drivers and vehicles across the industry.

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Will Dunn, Why is there an Uber shortage? (New Statesman, 8 November 2021)

Caroline Tanner, Why yellow cabs are (again) your best bet in New York City (MSN, November 2021)

James Tapper, Black cabs roar back into favour as app firms put up their prices (Guardian, 30 October 2021)

On the Nature of Platforms

There are several ways of thinking about platforms.

Economists tend to view platforms as essentially containers for transactions. Canonical examples: Amazon, Airbnb, iTunes, Netflix, Uber.

One of the economic advantages of these transaction platforms is that they also act as container for content. When it launched in 1995, the Amazon website boasted a million books - far more than you could find in any bookshop. (This is related to the concept of the Long Tail.) So it becomes a place you can browse books and check reviews, independently of any intention to buy.

Transaction platforms may also enable a significant reduction in transaction costs. This creates an opening for micro-transactions of various kinds - in other words transactions that would previously have been too small to be economically viable. Smaller-grained transactions can allow previously under-utilized assets to be used more economically - for example selling an empty passenger seat on a car journey.

Transaction platforms may also act as a container for data and/or metadata. Dave Chaffey describes "Customers Who Bought X ... Also Bought Y" as Amazon's signature feature. (Amazon.com case study, 30 June 2014)

This notion of platform can be extended to containers of other modes of activity or collaboration or exchange, where there may be no direct financial transaction. Canonical examples: Facebook, PlayStation Network, Linked-In, Skype.

There are various business models underlying these activity platforms, including freemium (Linked-In, Skype), post-sale delivery and engagement (PSN), and advertising. As many people have observed, Facebook inherits a principle that was originally formulated for commercial television - if you are not paying, you are the product. In other words, the underlying transaction is the one between Facebook and its advertisers, whereby Facebook rents out the user to its paying customers.

These platforms are typically described as two-sided or multi-sided. Among other things, multi-sidedness implies some choices about pricing strategy - how to distribute the costs and added-value of the platform between the different sides. For example, credit card provides a transaction platform between consumers and merchants - the credit card company has a choice whether to charge everything to the merchants or to charge the consumers as well. And Facebook and Google provide user services for free, although perhaps one day we shall be so addicted to their services that they can make us pay hard cash to continue.

A different way of thinking about platforms is as a container for capabilities or services. Here, the canonical example would be Amazon Web Services (AWS). At the CBDI Forum, we were writing about AWS over ten years ago, but many people only became aware of AWS when it grew into a massive business in its own right. (Amazon and eBay, August 2004)

The key idea here is that you can build a business on top of a platform. Thus a start-up online retailer doesn't need to build all the necessary capabilities in-house, because there is a platform of services already available. In the 1990s, telecoms companies were looking for ways to create value-added services on top of the basic communication platforms.

Many companies already have a platform, but they are trying to raise it. For example, the traditional role for telecoms companies is as a platform of telecoms connectivity. But it has been obvious for ages that there is no long-term profitability for telecoms from providing services at this level. So telecoms companies have long understood the need to raise the platform, to offer higher-value services. But they are still struggling to formulate and implement this strategic change. Why is it so difficult? (Business as a Platform, March 2006) 

Similar structures can be found in the physical world. In addition to managing real platforms at railway stations, Network Rail provides a "platform" on which the train operating companies can run their business. In theory these are services with strict service level agreements and contractual or regulatory penalties, although the actual stack geometry is arguably flawed. (Business Service Architecture - Railway Edition, June 2006)

In retail, some large department stores have turned themselves into marketplaces in which franchise retailers can sell their products. Other retailers have experimented with a business model in which the goods are owned by the supplier up to the point at which they are purchased by the supplier. Thus the store becomes a platform for the supplier to merchandise and sell products. See also Nick Vitalari, Walmart and The Power of the Business Platform (Sept 2011).

Platforms are sometimes described as more or less open or closed. For example, the Open Banking Platform. Platform controllers often seek to impose quality or technical constraints on businesses using the platform - for example, Apple iTunes. Thus the notion of openness has a range of meanings, from market openness (e.g. no barriers to entry and exit) to technological openness (e.g. flexibility of mechanism). (Types of Openness, November 2001)

So when business strategy consultants talk about a platform business, this can also refer to the flexible and open-ended exploitation of an asset or capability, to create or co-create value in as many ways as possible. For example, here is John Hagel in 2006, talking about Steve Jobs and Disney.

In a world of scarce attention, creators of media products will need to compete with those who re-conceive media products as platforms. What is the difference? Products are designed to be used on a standalone basis – you buy it and you view it or listen to it in the specific way the content creator intended. Platforms are designed to be built upon – they create opportunities for the original creator, third parties or the customers themselves to extend, enhance and tailor the content in ways that the original creator never anticipated. Offered as a platform, content can create far more value than any equivalent standalone product. (Disney, Pixar and Jobs, Feb 2006)

Finally, we may note that although many of these platforms may be described as "digital", many of the same basic characteristics can be found in both digital and non-digital modes. And what even counts as "non-digital" these days, when every aspect of our lives can be wired to the Internet? So I prefer not to talk about digital platforms any more - they are just platforms.

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Further Reading

Philip Boxer, What Distinguishes a Platform Strategy? (Asymmetric Design, May 2012)

Diane Coyle, The Social Life of Platforms (Enlightenment Economics, May 2016)

For John Hegel's latest thinking about platforms, see The Big Shift in Business Platform Models (Edge Perspectives, January 2017)

Related posts: Business Geometry (September 2004), Multi-Sided Platform Strategies (April 2013)

Uber Mathematics 2

Aside from the discussion of Uber as a two-sided platform, addressed in my post on Uber Mathematics (Nov 2016), there is also a discussion of Uber's overall growth strategy and profitability. @izakaminska has been writing a series of critical articles on FT Alphaville.

Uber is wildly unprofitable, suggest that prices will rise once they've succeeded at monopolizing the industry: https://t.co/m3HB3q5YZV pic.twitter.com/taXcHfD2g5

— Justin Wolfers (@JustinWolfers) December 1, 2016

There are a few different issues that need to be teased apart here. Firstly, there is the fact that Uber is continually launching its service in more cities and countries. Nobody should expect the service in a new city to be instantly profitable. The total figures that Kaminska has obtained raise further questions - whether some cities are more profitable for Uber than others, whether there is a repeating pattern of investment returns as a city service moves from loss-making into profit. Like many companies in rapid growth phase, Uber has managed to convince its investors that they are funding growth into something that has good prospects of becoming profitable.

Profitability in Silicon Valley seems to be predicated on monopoly, as argued by Peter Thiel, leveraging network effects to establish barriers to entry. This is related to the concept of a retail destination - establishing the illusion that there is only one place to go. Kaminska quotes an opinion by Piccioni and Kantorovich, to the effect that it wouldn't take much to set up a rival to Uber, but this opinion needs to be weighed against the fact that Uber has already seen off a number of competitors, including Sidecar. Sidecar was funded by Richard Branson, who asserted that he was not putting his money into a "winner-takes-all market". It now looks as if he was mistaken, as Om Malik (writing in the New Yorker) respectfully points out.

But is Uber economically sustainable even as a monopoly? Kaminska has raised a number of  questions about the underlying business model, including the increasing need for capital investment which could erode margins further. Meanwhile, Uber will almost certainly leverage its cheapness and popularity with passengers to push for further deregulation. So the survival of this model may depend not only on a continual supply of innocent investors and innocent drivers, but also innocent politicians who fall for the deregulation agenda.

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Philip Boxer, Managing over the Whole Governance Cycle (April 2006)

Izabella Kaminska, Why Uber’s capital costs will creep ever higher (FT Alphaville, 3 June 2016). Myth-busting Uber's valuation (FT Alphaville, 1 December 2016). The taxi unicorn’s new clothes (FT Alphaville, 13 September 2016) FREE - REGISTRATION REQUIRED

Om Malik, In Silicon Valley Now, It’s Almost Always Winner Takes All (New Yorker,
30 December 2015)

Brian Piccioni and Paul Kantorovich, On Unicorns, Disruption, And Cheap Rides (BCA, 30 August 2016) BCA CLIENTS ONLY

Peter Sims, Why Peter Thiel is Dead Wrong About Monopolies (Medium, 16 September 2014)

Peter Thiel, Competition Is for Losers (Wall Street Journal, 12 September 2014)



Related Posts Uber Mathematics (Nov 2016) Uber Mathematics 3 (Dec 2016), Uber Mathematics 4 (September 2021)

Uber Mathematics

UK Court News. Uber has lost a test case in the UK courts, in which it argued that its drivers were self-employed and therefore not entitled to the minimum wage or any benefits. Why is this ruling not quite as straightforward as it seems, as @JeffreyNewman asks? To answer this question, we have to look at the mathematics of two-sided or multi-sided platforms.

Platforms exist in two states - growth and steady-state. A mature steady-state platform maintains a stable and sustainable balance between supply and demand. But to create a platform, you have to build both supply and demand at the same time. Innovative platforms such as Uber are oriented towards expansion and growth - recruiting new passengers and new drivers, and launching in new cities.

New Passengers

Every week in London, 30,000 people download Uber to their phones and order a car for the first time. The technology company, which is worth $60bn, calls this moment conversion. It sets great store on the first time you use its service ... With Uber, the feeling should be of plenty, and of assurance: there will always be a driver when you need one. Knight

New Drivers

They make it sound so simple: Sign up to drive with Uber and soon you’ll be earning an excellent supplementary income! That’s the central message in Uber’s ongoing multi-platform marketing campaign to recruit new drivers. McDermott

New Cities

Uber has deployed its ride-hailing platform in 400 cities around the world since its launch in San Francisco on 31 May 2010, which means that it enters a new market every five days and eight hours. ... To take over a city, Uber flies in a small team, known as launchers and hires its first local employee, whose job it is to find drivers and recruit riders. Knight

But here's the problem. In order to encourage passengers to rely on the service, Uber needs a surfeit of drivers. If passengers want instant availability of drivers (plenty, assurance, there will always be a driver when you need one), then Uber has to maintain a pool of under-utilized drivers. (Knowles)

Simple mathematics tells us that if Uber takes on far more drivers than it really needs, some of them won't earn very much. Furthermore, people with little experience of this kind of work may underestimate the true costs involved, and may have an unrealistic idea of the amounts they can earn: Uber has no immediate incentive to disillusion them. (This is an example of Asymmetric Information.) Even if the average earnings of Uber drivers are well above the minimum wage, as Uber claims, it is not the average that matters here but the distribution.

The myth is that these are drivers who can choose whether to provide a service or not, so they are free agents. Libertarians wax lyrical about the gig economy and the benefits to passengers. However, the UK courts have judged that Uber drivers work under a series of constraints, and are therefore to be classified as workers for the purposes of various regulations, including minimum wage and other benefits.

Uber has announced its intention to appeal the UK judgement. But if the judgement stands, what are the implications for Uber? Firstly, Uber's overall costs are likely to increase, and Uber will undoubtedly find a way either to pass these costs onto the passengers or to pass them back to the drivers in some other form. But more interestingly, Uber now has a financial incentive to balance supply and demand more fairly, and to avoid taking on too many drivers.

Uber sometimes argues it is merely a technology company, and is not in the transportation business. Dismissing this argument, the UK courts quoted a previous judgement from the North California District Court:

Uber does not simply sell software; it sells rides. Uber is no more a technology company than Yellow Cab is a technology company because it uses CB radios to dispatch taxi cabs.

However, Uber's undoubted technological know-how should enable it to develop (and monetize) appropriate technologies and algorithms to manage a two-sided platform in a more balanced way.

Update: similar concerns have been raised about Amazon delivery drivers. I have previously praised Amazon on this blog for its pioneering understanding of platforms, so let's hope that both Amazon and Uber can create platforms that are fair to drivers as well as its customers.

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Mr Y Aslam, Mr J Farrar and Others -V- Uber (Courts and Tribunals Judiciary, 28 October 2016)

Sarah Butler, Uber driver tells MPs: I work 90 hours but still need to claim benefits (Guardian, 6 February 2017)

Tom Espiner and Daniel Thomas, What does Uber employment ruling mean? (BBC News, 28 October 2016)

David S. Evans, The Antitrust Economics of Multi-Sided Platform Markets (Yale Journal on Regulation, Vol 20 Issue 2, 2003). Multisided Platforms, Dynamic Competition and the Assessment of Market Power for Internet-Based Firms (CPI Antitrust Chronicle, May 2016)

Sam Knight, How Uber Conquered London (Guardian, 27 April 2016)

Kitty Knowles, 10 of the biggest complaints about Uber – from Uber drivers (The Memo, 5 November 2015)

Barry Levine, Uber opens up its API – and creates a new platform (VentureBeat, 20 August 2014)

John McDermott, I've done the (real) math: No way an Uber driver makes minimum wage (We Are Mel, 17 May 2016)

Hilary Osborne, Uber loses right to classify UK drivers as self-employed (Guardian, 28 October 2016)

Aaron Smith, Gig Work, Online Selling and Home Sharing (Pew Research Center, 17 November 2016)

Ciro Spedaliere, How to start a multi-sided platform (30 June 2015)

Amazon drivers 'work illegal hours' (BBC News, 11 November 2016)

See further discussion with @wimrampen and others on Storify: Uber Mathematics - A Discussion


Related Posts
Uber Mathematics 2 (Dec 2016) Uber Mathematics 3 (Dec 2016)
Uber's Defeat Device and Denial of Service (March 2017)



Updated 6 February 2017. Reformatted 18 July 2022

Multi-Sided Platform Strategies

A multi-sided platform business has the following characteristic features.

1. The platform serves two or more distinct categories of customer. For example, a credit card platform serves both cardholders and merchants. For example, a heterosexual dating agency serves both men and women.

2. The platform provides a mechanism for connecting customers from different categories. The credit card increases the potential interaction between cardholders and merchants, as well as processing the transactions. And the dating agency brings men and women together.

3. The value of the platform to one category of customers depends on the quantity and quality of the other categories. For example, the value of a credit card to the cardholder depends on the number of merchants that accept the card. Meanwhile, the value of the card to the merchant depends on the number of cardholders.

Under certain circumstances, it might be possible to build one side of the platform first. For example, if you had some brilliant idea for a entirely new kind of credit card, and had a lot of funding and a persuasive sales team, you might conceivably be able to recruit a large number of merchants into the scheme before you had any cardholders at all. Or imagine persuading a group of men to invest all their spare time for two years building a nightclub that would (when finished) attract the hottest women in the city. But this strategy requires a considerable degree of confidence and trust. So in practice it usually makes sense to build up both sides at the same time.

There are various strategies that can be used to create a multi-sided platform. Sometimes it is possible to start small. When Frank McNamara created Diners Club in 1950, he started in a small geographical area (Manhatten), with 14 merchants and a few hundred cardholders. Within a year, he had 300 merchants and 40,000 cardholders.

When American Express wished to enter the market in 1958, it needed to create something quickly that could compete with Diners Club. One way to do this was to acquire and consolidate some existing schemes. But the key element to the American Express's success was a marquee strategy - recruiting the most desirable customers (e.g. business travellers on expense accounts) and the most desirable merchants (e.g. high status hotels, restaurants and stores).

A marquee strategy depends on a degree of exclusivity, real or imagined. In a multi-sided market, you don't gain directly from the number of people on your own side, since they may be competing with you for the attention of the people on the other side.

American Express is now much larger than Diners Club. So much for first-mover advantage then. The most desirable customers are not necessarily the ones with the greatest willingness to experiment with a novel platform. Novel platforms tend to attract early adopters and low-value customers (AltaVista, MySpace, OnSale). Once the platform concept is understood, a new entrant may be more successful in recruiting the high-value and mainstream customers (Google, Facebook, eBay).

Among users of Facebook and Twitter, a gulf is emerging between celebrities and other users. Facebook is currently experimenting with charging a fee for ordinary users to send messages to celebrities. According to the Independent, Facebook plans to keep this money itself. Presumably the only benefit to the celebrity is helping to filter incoming messages. And of course many celebrities are now dependent on Facebook and Twitter for maintaining their public profile, so they are not able to walk away.

The growing distinction between different categories of user marks a transition from same-side network effects (which assume a single category of user) into a multi-sided platform. Linked-In is another platform that is making this transition. Linked-In gets much of its revenue from the recruitment business, so it is essentially a market-making platform. Whereas Facebook and Twitter remain largely audience-making platforms.

(For the distinction between market-making and audience-making platforms, as well as a third category of demand-coordination platforms, see David S Evans.)


I spoke at the IASA UK Architecture Summit on 26th April on Architecting the Multi-Sided Business. Please contact me if you have any practical challenges in this area.

Architecting multi sided business 2 from Richard Veryard

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Pieter Ballon, Platform Types and Gatekeeper Roles: the Case of the Mobile Communications Industry (2009)

Mark Bonchek and Sangeet Paul Choudary, Three Elements of a Successful Platform Strategy (HBR Blog Network Jan 2013)

David S. Evans, Managing the Maze of Multisided Markets (Strategy+Business Fall 2003)

David S. Evans, The Antitrust Economics of Multi-Sided Platform Markets (Yale Journal on Regulation, 2003)

David S. Evans and Richard Schmalensee, Failure to Launch: Critical Mass in Platform Businesses (Sept 2010)

Thomas Eisenmann, Geoffrey Parker, and Marshall W. Van Alstyne, Strategies for Two-Sided Markets (HBR October 2006)

James Legge, Facebook now charges you for messages sent to celebrities and people you aren't friends with (Independent 7 April 2013)

Lisa O'Carroll, Facebook starts charging users up to £11 to contact celebrities (Guardian 8 April 2013)

Geoffrey Parker and Marshall Van Alstyne, A Digital Postal Platform: Definitions and a Roadmap (MIT Jan 2012)

Richard Veryard, The Component-Based Business: Plug and Play (Springer 2001)

Understanding LinkedIn Business Model (BMI Matters May 2012)


Related Posts: On the Nature of Platforms (July 2017)

Links added 7 September 2017

A Cautionary Tale

Heard an interesting story recently, from a software developer advocating Scrum. I shall omit the names of the companies and individuals, and I may get a few of the details wrong, to avoid embarrassing anyone.

Our hero was working for a mobile device company, responsible for defining software requirements. At one point in this job, he was sent to negotiate an interface with a social networking company. The programmers at the social networking company were very keen that the social networking application (app) should be zero-rated - in other words, the users should not have to pay network charges for using the app - so our hero dutifully recorded this as a requirement and built it into the app.

When our hero returned to his company's offices, he discovered to his dismay that the sales and marketing people were very cross with this arrangement. They felt that this damaged the interests of the device company and their network partners (who usually want to generate network revenue from the use of such apps).

Our hero felt bad. Clearly he had let his company down, by failing to consult all the stakeholders before agreeing to this arrangement.

For my part, I thought our hero was being too hard upon himself. After all, the device company was operating in a highly competitive multi-sided market, and deciding how to balance the interests of different stakeholders was therefore a delicate strategic judgement. Our hero was sent off to perform this delicate task without any proper briefing or guidance or policy. Or architecture. I thought it significant that it was the sales and marketing department that got cross, because this implied the absence or abdication of any strategic planning or architectural function who, if they were doing their job properly, should have anticipated this difficulty. How was our hero supposed to know who all the possible stakeholders were, if he didn't have a decent model of the ecosystem?

So this is also a story about the proper balance between agile development (with all its potential advantages) and architecture (with its attention to strategic risk). A proper architecture will look at the business and its ecosystem from several viewpoints including the Motivation View, which highlights value conflicts and differences of interest between different partners.

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In response to @allankellynet who commented "Scrum/Agile irrelevant, guy was not briefed, had not spoken to stakeholders. Could happen on any method", I should make clear that I'm not blaming Scrum as such, I'm bemoaning the lack of effective architecture. There is a great deal of guidance about combining Scrum/Agile with architecture - for example, see this Linked-In discussion Does Agile/Scrum negatively impact software architecture?
 

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@brwalsh, Monetization: Money for Nothing (Cisco Communities, June 2011)

@mutlu82, Facebook Does A Deal With Mobile Operators To Produce New Mobile Site With Zero Data Charges! (Mobile Inc, May 2010) 



updated October 23rd 2012

Does everyone (except Google) have a platform strategy?

#bizarch The obvious ones - Apple, Amazon, Microsoft

General comments

"The new market disruption is the migration of a large number of demanding customers away from phones-as-voice-products to phones-as-computing-products. The low-end disruption is the migration of a large number of less demanding customers from branded phones to unbranded, commodity phones. ... The new market disruption is evidenced by the shift of fortunes to Apple and Samsung and away from every other device maker." Horace Dediu, The phone market in 2012: a tale of two disruptions (May 2012)

"Apple is the most valuable company in technology (and indeed in the world) because it integrates hardware, software and services. It’s the first, and only, company to do all these three well in service of jobs that the vast majority of consumers want done." Horace Dediu, Which is best: hardware, software or services? (May 2012)

Disney

• John Hagel, Disney, Pixar and Jobs (February 2006)

• Disney, Pixar, Apple and Jobs (February 2006)

Back in 2006, people like Hagel thought that Steve Jobs didn't understand platforms. Maybe he didn't then, but he certainly caught up later. 

eBay

• Dare Obasanjo, eBay Web Services: A Marketplace Platform for Fun and Profit (March 2006)
• Haydn Shaughnessy, eBay's Platform Strategy (Oct 2011)

Elsevier

• Smart Content (Oct 2011)

Nike

• Nick Vitalari, Competition and the Elastic Enterprise: Business Platforms, Personal Biometrics and Strategic Options: Nike and FuelBand (Jan 2012)

• Art Petty, Systems Thinking Meets Platform Strategy and Social Media via Nike+ (March 2012)

Nokia

• Ron Adner, A Sad Lesson in Collaborative Innovation (HBR May 2012)
• The partnership between Nokia and Microsoft "is a clear admission that Nokia's own-platform strategy has faltered," said Ben Wood, an analyst with research firm CCS: Insight. (BBC News, Feb 2011)

Walmart

• Nick Vitalari, Walmart and The Power of the Business Platform (Sept 2011)

and finally Google

• Steve Yegge, “Stevey’s Google Platforms Rant” (Oct 2011)
• Christopher Meyer, Steve Yegge's Google Platform Rant (Oct 2011)

Steve Yegge compares Google with Amazon: Google has a lot of things in its favour, but its platform strategy is not one of them. See my comment Google as a Platform (NOT) (Oct 2011) 

• "Page and his management team have mandated that all Googlers focus on seven business areas, and that they don’t look to expand Google’s reach beyond these core initiatives." Farhad Manjoo, Google's Grand Plan (Slate, March 2012)

• "Page's emphasis on streamlining Google's product line has made the company's thousands of employees focused on how -- and if -- a tool adequately fulfills users' needs." Bianca Bosker, Google's Future (Huffington Post, March 2012)

 That's not a platform strategy, that's a traditional product portfolio strategy!

• Eric Jackson, Google's Paranoid Structure has made it less innovative, not more (Forbes, April 2012)

What Makes a Platform Open or Closed?

#bizarch @nickvitalari sees signs of resurgence at #Microsoft. Everyone Beware: Microsoft is Alive Again and May Become an Elastic Enterprise (April 2012)

Vitalari sees Microsoft's deal with Barnes and Noble as a promising signal, although he admits that it is open to conflicting interpretations. On the one hand, the idea that you can compete with Amazon by getting into bed with Barnes and Noble looks suspiciously like the idea that you can compete with Google by getting into bed with Yahoo. On the other hand, the deal might have the potential of getting Microsoft membership of the elite club that Vitalari and Shaunessy call "The Elastic Enterprise". (See my post on Business as a Platform at Amazon, discussing Shaunessy's recent blogpost.)

Among other things, I was intrigued by Vitalari's comparison between Apple and Microsoft.

"Microsoft was the undisputed leader in the formation of 20^th Century ecosystems, along with Cisco and WalMart. Everyone envied Microsoft’s partnership with Intel and the extensive VAR (value-added reseller) system they created.  But the ecosystem was closed.  Anyone who participated in the old Microsoft ecosystem had to be approved and most importantly it did not have a powerful business platform as seen today with Apple, Amazon or Google.  But that is changing."

Most software historians perceive the difference between Apple and Microsoft the other way around.

"The more restrictive a platform, the less attractive it becomes. Had Microsoft imposed T and Cs as restrictive as Apple’s on Windows software developers, Windows would not have achieved the dominance it did during the 1990s." (Jack Gavigan, Apple's Platform Strategy, June 2011)

"What Apple is trying to do is prevent companies from building phones with multi-touch user interfaces. They want to freeze innovation in the space so that they are the only ones to have the features people want." (John Carroll, Why I (now) hate Apple, ZDNet, 4 March 2010)

"From the beginning, Jobs resolutely resisted efforts to unbundle the Macintosh operating system from the hardware. This contributed significantly to the long-term erosion of both Apple’s hardware and software market share in the computer business relative to more focused players like Microsoft and Dell.  From his perspective, perfection requires tight integration. In working with Disney, Jobs is likely to push for larger, more tightly integrated content – exactly the opposite direction from the one required to maximize returns on content development in a world of attention scarcity." (John Hagel, Disney, Pixar and Jobs, February 2006)   

From this point of view, Microsoft beat Apple because its platform was more open. Some people may have thought that Microsoft didn't care enough about controlling the quality of third party developers, and Apple cared too much - but for many years it was the Microsoft platform strategy that was more commercially successful. Apple's commercial breakthrough didn't come as a result of changing its platform strategy, but extending it - in other words, radical adjacency. Above all, iTunes as the killer app.

But then this is evidence that a proprietary platform, like iTunes or Twitter, will sometimes produce the strongest network effects. Here's Jack Gavigan again.

"In principle, there’s no barrier to building an open version of Twitter. ... But Twitter don’t want that because, in that scenario, the network effects that currently drive everyone to Twitter would be neutralised." (Jack Gavigan, Open vs Proprietary platforms, March 2011)

People talk about different platform strategies, using terms like "open" and "closed", but these terms seem to have worryingly unstable meanings. Platform strategy is clearly a critical question for business architecture, but business architects don't always seem to have consistent ways of describing platform strategy, let alone predicting its consequences.

Business as a Platform - Amazon

#bizarch Excellent article by @haydn1701 on Why Amazon Succeeds (Forbes, 29 April 2012) via @davegray and @ruthmalan.

Haydn Shaunessy points out the following features of Amazon's strategy.


Understanding ecosystem

Shaunessy starts by defining the notion of ecosystem fairly narrowly, and links it to the information market. "Bezos is not as great as Jobs at playing the information market but he is good." This may well be true, but it misses the point. Jeff Bezos's understanding of ecosystem has always been much more profound than that of any of his peers, and Amazon's ecosystem is a lot broader than zen marketing.

One way of seeing it is that Jobs coerced people to do things that were in his (Apple's) interests, whereas Bezos gives them opportunities to do things in their own interest, from which he benefits in more subtle but perhaps more sustainable ways. But of course there's always another story.

Radical adjacency

The ability to go beyond normal business practice and to seize opportunity in widely adjacent markets.

Business-as-a-platform

Shaunessy identifies a number of characteristics

• Tearing business away from "the straight jacket of old management theory" - "the outdated idea of core competency" 

• Providing a new way to scale business

• Bringing (shared) value to all parties

Technical enablers

Shaunessy identifies two in particular

• Universal connectors - not merely technical protocols but contractual protocols that radically reduce the transaction costs of using the platform 

• Cloud computing

Organizational enablers

Shaunessy talks about ability to attract and retain very talented, imaginative resources. I would also add the ability to build these into an effective and innovative company - what I call Organizational Intelligence.


Strategic Outcome

This combination of strategies has allowed Amazon and Apple to develop what Shaunessy calls complex options portfolios. He notes that "the ecosystem is full of businesses that can jump quickly into new opportunity" and argues that this yields the true meaning of shared value.

Smart Content

There are several characteristic features of so-called smart content.

• Content enhanced to be fit-to-purpose ... content that is organized and structured for customer tasks and needs, not just for the production, packaging and distribution of physical documents. (Mirko Minnich, ex Elsevier)

• Self-organizing and transparent content, organizing itself automatically depending on your context, goals, and workflow, and allowing you to see why it's doing what it's doing. (Mark Stefik, Xerox PARC)

• Granular at the appropriate level, semantically rich, useful across applications, and meaningful for collaborative interaction. (Gilbane Group)

• Has good metadata (not lots), fit for purpose, uses classifications to provide context and aid discoverability (Madi Solomon, Pearson)

And there are several characteristic technologies that are supposed to facilitate smart content, among other things. Some of these technologies are linked to Sir Tim Berners-Lee. Come on Tim!

• Semantic technologies to cross-reference and cross-polinate with other kinds of content. (Madi Solomon, Pearson)

As Natasha Fogel pointed out, "smart content is in the eye of the beholder" - in other words, the perceived smartness of content is relative to its context of use.

But in this post, I don't want to talk about the technologies themselves but about the emerging value propositions that may be supported by smart content. Last year, when he was a SVP at scientific and technical publisher Elsevier, Mirko Minnich talked about two key enablers for smart content. Firstly a value-adding process - transmuting content into scientific data, and transmuting scientific data into solutions. And secondly what he calls a product bridge, not only linking content with data but also linking the content business with the data analytics business. The product bridge appears to be a kind of platform, and Mirko was using the term "Smart Content" to refer to the platform itself as well as the content delivered on the platform.

Mirko's strategy at Elsevier represented a strong drive towards asymmetric design - in other words, recognizing that in order to deliver indirect value into a complex ecosystem you have to move away from a traditional product-based business model (in Elsevier's case, selling scientific journals) towards regarding your business as a multi-sided platform.


Mark Stefik (Xerox PARC) puts smart content into an organizational intelligence frame - the intelligence is now located (reified) in the content as well as in the people producing and consuming the content. Instead of the user asking "what content do I need", Mark wants the content to ask "who needs me?" Madi Solomon (Pearson) seems to be suggesting the exact opposite when he mentions the Big Shift from Push to Pull in his recent presentation on Smart Content. We can resolve this apparent contradiction only by understanding the intelligence as the property of the whole system rather than trying to locate it in one place - see my material on organizational intelligence.

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Sources

Seth Grimes, Six definitions of smart content (Information Week, Sept 2010)Several of the quotes above come from this article.


Technology in Publishing (Editors Update, Elsevier, Jan 2011)
Next Generation Clinical Decision Support (Elsevier Press Release, Feb 2011)

Madi Solomon, Making Information Pay (April 2011)

Intelligence Failure at Kodak

@mkplantes sees the demise of Kodak as an intelligence failure.

Put yourself in their Kodak leaders’ chairs for a moment and consider the four expectations of a leadership team and, more importantly, consider the speed with which they had to work though all of the expectations:

• Sense what’s going on around you? (“Digital is coming!”)
• Make sense of what you see, hear, and feel (“Film is dying, but we can’t kill it now. It’s too important!”)
• Decide on a course of action (“OMG! Nothing is as big as film is now. Let’s think about this and be careful.”)
• Act on your decisions (“Well, this is a big ship! Hard to change course overnight!”)

Kay Plantes, A sad “Kodak moment” business model failure WTN News 7 October 2011

This is effectively an OODA loop. Dr Plantes identifies a number of possible errors in this loop.

1. Incorrect estimate of the pace of change. "Successful companies often underestimate the speed of industry evolution."

2. Incorrect understanding of the value proposition from the customers' perspective. "People don’t buy film, they use film to capture the pictures they want."

3. Incorrect optimization of the basis of competition - commodity wars.

If it was a strategic error for Kodak to get caught up in a dogfight with Fuji, we should also ask how Fuji is faring? Has Fuji committed the same errors as Kodak, and is it suffering the same fate? Meanwhile, Stuart Henshall compares Kodak with HP: two inventive companies, who "failed time and time again to find a more agile footing". (HP - What's Your strategy? August 2011).

Dr Plantes complains that Kodak was focused on the product rather than the value received by its customers - in other words, a platform strategy. But Kodak has been trying to shift its business model from product to a service-oriented platform for at least five years. In November 2006, an article in BusinessWeek described this transformation, and outlined some of the big challenges then facing Kodak (Mistakes made on the road to innovation, BusinessWeek November 2006). In February 2007, Clayton Christensen and Scott D. Anthony saw the Kodak strategy as an ambitious attempt to implement Christensen's concept of disruptive innovation (Will Kodak's New Strategy Work? Forbes February 2007).


Antonio Perez (who spent much of his career at HP) has been the CEO throughout this period, and has watched the Kodak share price drop from around $25 to less than $1. We may infer that Kodak has failed to overcome the challenges identified by BusinessWeek and Christensen. But why?


What's missing from Dr Plantes' analysis is an appreciation of how these four steps operated as an effective OODA loop, with feedback and learning, rather than merely repetition. In a detailed analysis of Kodak strategy, George Mendes concludes

Kodak is an example of repeat strategic failure – it was unable to grasp the future of digital quickly enough, and even when it did so, it was implemented too slowly under a continuous change strategy and ultimately it did not fit coherently as a core competency.

George Mendes, What went wrong at Eastman Kodak (pdf), TheStrategyTank

There is a great deal on the Internet about Kodak's social media strategy - but it seems to be largely about Kodak marketing communications. Journalist Courtney Boyd Myers (@CBM) invites us to Meet the brilliant and beautiful woman behind Kodak’s social media strategy (September 2011). The woman in question is extremely photogenic and obviously good at self-promotion, but there is nothing strategic in the article. The big strategic error here is to regard social media and content management as a marketing issue, separate from the business model itself. This seems to suggest a lack of joined-up thinking - and ultimately a failure of organizational intelligence.


In 2007, Jacob McNulty thought that that instilling the elements of a learning organization would have strongly contributed to a different story for Kodak’s recent years.

A learning organization is one that learns from its mistakes and successes, spots trends in the market and acts on them by being nimble enough to do so.  A culture of learning rewards knowledge sharing which reduces the chances that you’ll be blindsided by something like digital in 2007. Kodak could have presented themselves as a picture company many years ago - whether those pictures are on film or in a file it shouldn’t matter.  Part of making that transition would require a company that is ready to learn and develop.

Jacob McNulty, Not a Kodak Moment (2007)

Other sources claim that Kodak is a learning organization. In which case, why has it failed to learn the things that matter?

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 book now  Business Architecture Bootcamp (November 22-23, 2011)
 book now  Workshop: Organizational Intelligence (November 24th, 2011)

Google as a Platform (not)

Google vs Amazon (again). @davidsprott reckons Steve Yegge's rant is spot on. Steve Yegge is a software engineer who used to work for Amazon and now works for Google, despite the supposedly accidental publication of a long and opinionated rant (his words) complaining that

'[what] Google doesn't do well is Platforms. We don't understand platforms. We don't "get" platforms.'

(For more context, see Steve Yegge's second thoughts on Google+).

Waddya mean, Google doesn't get platforms? Surely Google is a major player in platform, especially in the so-called Cloud? Dion Hinchcliffe sounded fairly convinced when he was Comparing Amazon's and Google's Platform-as-a-Service (PaaS) Offerings back in April 2008.

"Amazon and Google have strategically built up an extensive set of services over the last few years and have made some very interesting assumptions that will determine who their customers are (consumers, startups, enterprises) and what type of business models can sit on top of them (advertising, subscriptions, cheapest source of outsourced computing resources). ... Google and Amazon have emerged to be the leaders in this space while Microsoft, IBM, and especially Oracle and SAP are either well behind or have unclear plans to enter the PaaS space. Both of these companies formed their DNA around the world of the Web and deeply understand how to leverage the enormous strengths of the Web platform."

So what went wrong? This guy (Yegge) sure knows one thing, says @pardhas, building platforms is not just collecting your products on one plate. For Yegge, platforms is about eating your own dogfood. Not just Amazon, but also Facebook - hey, even Microsoft understands platforms better than Google.

But there is something missing from Steve Yegge's account. He sees the (lack of) platform from an engineering perspective, but what he doesn't talk about is the enterprise/ecosystem perspective.

@davidsprott's tweet ends with the formula "SOA + platforms = competitive advantage".  David and I have written a great deal about ecosystem SOA and ecosystem architecture, and we have long credited Jeff Bezos of Amazon as someone who "gets" ecosystem.

Among other things, "getting ecosystem" means understanding the variety of ways in which the social complexity of collaborations create value for the customer, and therefore how, from the perspective of the supplier, platform architectures can capture indirect value. See Philip Boxer's presentation on supporting social complexity in collaborative enterprises, as well as my presentation on Next Generation Enterprise Architecture, both from the recent Unicom EA Forum in London.

As I pointed out in my recent VPEC-T analysis of Google, Google is adopting a positional strategy - capturing some territory and defending it against its competitors. Amazon and Apple have shifted towards open source competition on their platforms (relational strategy) while Google is still closed-source.

In his post on Tomorrow's Networked Economy, @JDeragon praises Google+ for becoming an integrated portal. Er, wasn't that AOL's strategy? And Yahoo's for that matter? Maybe Google has greater ability to execute this strategy than they did, but it still looks more like yesterday's networked economy. Have you read Kevin Kelly's book?

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For Apple's shift from product to platform, see my post on Disney, Pixar, Apple and Jobs from February 2006.

For the shift from positional stategy to relational strategy, see Philip Boxer and Bernie Cohen, Triply Articulated Modelling of the Anticipatory Enterprise and Philip Boxer, Architectures that integrate  differentiated behaviours.

For more on Ecosystem SOA and Ecosystem Architecture, please browse the Ecosystem category on this blog. Here are some further links.

Jeff Bezos Letter to Shareholders (via Geekwire) (April 2011)
Bob Ellinger, Enterprise SOA vs Ecosystem SOA (April 2011)
Vaughan Merlyn, From Enterprise Architecture to Ecosystem Architecture (July 2008)
David Sprott, Introducing Smart Ecosystem Architecture (October 2009)

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Content or Platform?

Yesterday I was talking to a guy from a large media company about its social media strategy. The company is already successfully using social media for distributing and sharing content with its customers, but it doesn't have as much corporate presence as it might like. How might we use social media to talk about ourselves, to let people know about, say, job vacancies or our corporate ethics, he asked.

A media company is judged by its customers according to the range and quality of the content it provides - the company essentially provides a platform for this content. But how do you talk about the platform without interfering with the content? Will customers be turned off if we use the platform to talk about the platform?

At one extreme, there will be customers who really don't want to know about the platform at all. @dgwbirch tweets "I don't want to be friends with my bank, I want to be friends with my bank account. I want to follow my credit card, not my issuer".

But at the other extreme, there will be customers who may value other kinds of interaction. For example, a media company is always swamped with requests from young people for internships and work experience, and we can only grant a limited number of these requests. But suppose we could use social media to give a much larger number of young people the opportunity to develop some skills and show what they are capable of, provide them with decent feedback, and allow them to earn some token of experience that they could mention on their CVs.

Note how an innovative approach to strategy (in this case social media strategy) is driven by a quest - looking for different and innovative ways of creating direct and indirect value within our ecosystem. The widespread success of social media depends significantly on the fact that people are motivated by all sorts of things other than money.

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When I was a teenager, I entered a DJ competition, for which I had to nominate three singles. I chose one current hit, one old hit, and one new release. I failed to win the competition, and I guessed that my choice had been too obscure for the mainstream. The new release I had chosen was a folksy cover version of a song by Joni Mitchell; several months later, it started to get some airplay and shot to number one. I'm sure there's a lesson there somewhere.

A Twin-Track Approach to Government IT

#ukgovit @instituteforgov has just published a report called System Error: Fixing the Flaws in Government IT.

The report recommends a twin-track approach to government IT, based on the two concepts of Agile and Platform.

"The platform must standardise and simplify core elements of government IT. For any elements of IT outside the platform, new opportunities should be explored using agile principles. These twin approaches should be mutually reinforcing: the platform frees up resource to focus on new opportunities while successful agile innovations are rapidly scaled up when incorporated into the platform."

The report acknowledges the tension between these two concepts ...

"Treating items as commodities reduces cost but can limit flexibility; coordinating elements of IT across departments frees up resources but may move them further from frontline users; common standards support interoperability but also restrict the freedoms to innovate."

... and offers some general ideas for managing this tension.

• To act fully in the interests of government, an agile approach requires a light touch form of coordination at a system level. 

• To minimise duplication of effort in solving the same problems, there needs to be system-wide transparency of agile initiatives. 

• Existing elements of the platform also need periodic challenge. ... Transparency, publishing feedback and the results of experiments openly, will help to keep the pressure on the platform for continual improvement as well as short-term cost savings.

Trouble is, some of this stuff is really hard. The report talks glibly about "a less than intelligent customer", referring first to business users having an inadequate conception of the possible, and then to the public sector as a whole lacking the collective knowledge and skills to negotiate effectively with suppliers. This lack of intelligence is apparently blamed on the V-model development process, which creates the impression that the adoption of Agile methods would solve this problem. But the idea of Agile as a silver bullet is a dangerous one, as many people have already pointed out on the Linked-In discussion group.

One way of understanding the twin track approach is to think of the different kinds of economics involved.

• 'Platform' means delivering economies of scale and economics of scope.
• 'Agile' means delivering economies of alignment.

Combining the two introduces some complex architectural challenges, as I've written about here and elsewhere before. We call this Asymmetric Design. For an example of this approach applied to public sector IT, see an analysis of the CSA Case by Philip Boxer and myself. See also The Impact of Governance Approaches on SoS Environments (pdf) by Philip Boxer and others.


In the current economic situation, the public sector as a whole is charged with making massive cost savings, and it is crazy to imagine that cost savings of this scale would not be associated with significant structural change, including IT systems. This kind of disruptive innovation goes way beyond the economies of scale and scope, and introduces some serious questions about the economics of alignment.

The word "architecture" is mentioned a few times in the Institute for Government report, but only in passing as something that the Government CIO will look after. (Mostly technology or solution architecture, I only found one single reference to business architecture.) So there is an implicit idea of central thinking and hierarchical governance. But there are some architectural challenges here that are some way beyond the current practices of enterprise architecture.

Governance is also a significant problem. The report comments on the pendulum swings between centralized and decentralized provision, which is something we noted in the CSA case, and was also present in the case of ContactPoint (which we were in the middle of writing up when it was cancelled). Such pendulum swings are often a characteristic symptom of weak or unsustained governance.

Not only is this stuff structurally complicated, but there are some commercial stakeholders that have every incentive to maintain the complicated status quo, thanks to a grossly dysfunctional procurement process.

And there is an even bigger problem with the report, which is that it looks at government IT exclusively from within government - in other words, from the perspective of civil servants. For example, the report adopts a supply-side notion of "joined-up government", understood largely in terms of internal linkages and efficiencies between systems, and fails to mention the demand-side notion of "joined-up government" that involves a coherent experience for the citizen. (See my post on Joined-Up Government from December 2005.)

Meanwhile the notion of "user" appears to refer mainly to civil servants and other public sector workers. Surely the purpose of government IT is not to provide direct value to civil servants but to provide various forms of indirect value to individual citizens and socioeconomic communities.

The report regrets that "government IT [is] falling further and further behind the fast-paced and exciting technological environment that citizens interact with daily" and indicates "the potential for IT ... fundamentally changing the relationship between citizen and state". "Around the world governments are using technology to help them deliver better services, be more transparent and accountable, and connect more directly with their citizens." (Examples are cited from Canada, USA and Malaysia.)

And yet the report fails to explain how "agile" can adequately represent the demand side requirements of citizens, interacting with a broad range of government services while going about their public business. There is a completely different notion of "platform" required here - government as a platform, which Tim O'Reilly and others have been talking about for a couple of years. And a different notion of agility, which goes a lot further than agile software development.

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Other commentary

See Linked-In discussion group

Harry Metcalfe (2 March 2011) observed that many of the recommendations in the report were really hard, and was one of the first to complain about the insufficient attention to procurement in the report.

Ecosystem SOA 2

What are the problems of large complex sociotechnical systems? How far do SOA and enterprise architecture help to address this problem space, and what else might we need?


When I started writing about SOA and the service-based business over ten years ago, I defined two "cuts" across the service ecosystem. One cut separates inside from outside, while the other cut separates supply from demand.

(This diagram was included in my 2001 book on the Component-Based Business, and frequently referenced in my work for the CBDI Forum. For a brief extract from the book, see my Slideshare presentation on the Service Ecosystem.)

The inside/outside cut is sometimes called encapsulation. It decouples the external behaviour of a service from its internal implementation, and can be described in terms of knowledge - the outside has limited knowledge of the inside, and vice versa. (The cut is also sometimes called transparency - for example location transparency, which means that external viewers can't see where something is located.)

The supply/demand cut is about delegation, and can be described in terms of responsibility. Getting these two cuts right may yield economics of scale and scope; and the business case for SOA as a development paradigm is often formulated in terms of reusing and repurposing shared services.

For relatively small and simple SOA projects, it may be feasible to collapse the difference between these two cuts, and treat them as equivalent. (The inside/outside relationship and the supply/demand relationship are sometimes both described as "contracts", although they are clearly not the same kind of contract.) However, enterprise-scale SOA requires a proper articulation of both cuts: confusing them can result in suboptimal if not seriously dysfunctional governance and procurement. Many people in the SOA world still fail to understand the conceptual importance of these cuts, and this may help to explain why some organizations have had limited success with enterprise-scale SOA.

Going beyond enterprise SOA as it is generally understood, there is a third cut separating two views of a system: the system-as-designed (whose structure and behaviour and rules can perhaps be expressed in some formal syntax such as UML, BPMN or ArchiMate) and the system-in-use (whose actual performance is embedded/situated in a particular social or business context). This cut is critical for technology change management, because of the extent to which the designed system underdetermines the pragmatics of use. I have been talking about this cut for over twenty years, but only more recently working out how to articulate this cut in composition with the other two cuts.

One important reason for looking at the pragmatics of use is to understand the dimensions of agility. In many settings, we can see a complex array of systems and services forming a business platform, supporting a range of business activities. If no agility is required in the business, then it may not matter if the platform is inflexible, forcing the business activities to be carried out in a single standardized manner. But if we assume that agility is a critical requirement, then we need to understand how the flexibility of the platform supports the requisite variety of the business.

More generally, understanding the pragmatics of use leads to the recognition of a third kind of economic value alongside the economics of scale and the economics of scope: the economics of alignment. The value of a given system-of-systems depends on how it is used to deliver real (joined-up) business outcomes, across the full range of business demands. (I'm afraid I get impatient with people talking glibly and simplistically about business/IT alignment, without paying attention to the underlying complexity of this relationship.)

Understanding these three cuts (and analysing their implications) is critical to understanding and managing a whole range of complex systems problems - not just SOA and related technologies, not even just software architecture, but any large and complex sociotechnical systems (or systems-of-systems). If the three cuts are not understood, the people in charge of these systems tend not to ask the right questions. Questions of pragmatics are reduced to questions of platform design; while questions of the cost-justification and adoption of the platform are reduced to a simple top-down model of business value. Meanwhile the underlying business complexity (requisite variety) will be either misplaced (e.g. buried in the platform) or suppressed (e.g. constrained by the platform).

So there are three challenges I face as a consultant, attempting to tackle this kind of complex problem. The first challenge is to open up a new way of formulating the presenting problem, based on the three cuts. The second challenge is to introduce systematic techniques for analysing the problem and visualizing the key points. And the third challenge is to identify and support any organizational change that may be needed.

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With thanks to Philip Boxer and Bernie Cohen. For a different formulation of the three cuts, together with a detailed example, see their new paper "Why Critical Systems Need Help to Evolve" Computer, vol. 43, no. 5, pp. 56-63, May 2010, doi:10.1109/MC.2010.150. See also Philip Boxer, When is a stratification not a universal hierarchy? (January 30th, 2007)


Related post Ecosystem SOA (October 2009)

Disruptive business model for telephony

@martingeddes believes that "voice telephony is a market full of potential for the service providers, applications developers and innovators, and full of promise for both end customers and upstream business organisations such as contact centre operations" (New business model aims to bring voice back, BT plc Innovation).

"What would really be disruptive is the complete turning upside down of the telephony business model."

Martin identifies three key challenges, which roughly correspond to the three asymmetries identified by Philip Boxer and myself in Metropolis and SOA Governance (Microsoft Architecture Journal, July 2005).

Martin's first challenge is how users connect. “In the case of contact centres, traditional outbound calling can be unproductive for agents with an average of around fifty per cent of an agent’s time being spent on useful calls.”	The third asymmetry requires separating out the different contexts of use
Martin's second challenge is how upstream business and end-users interact. “This is where we would need to integrate our understanding of the customer with what the upstream organisation wants to do to interact with them. Small, network and applications-based intelligent telephony improvements that enable this to happen could lead to profitable interactions for businesses and better experiences for end-customers.”	The second asymmetry requires separating out business models that can organize supply from the solutions that are on offer.
Martin’s final challenge relates to how transactions will work. “The key here is developing and implementing intelligent telephony services.”	The first asymmetry involves separating out technology from the supply of specific products.

To become better at capturing asymmetric forms of demand, an organization such as BT needs leadership that will enable it to do two things:

• Take power to the edge of the organization: The people at the edge of the organization with the relationship to the asymmetric demand must be able to organize the business model they need to capture that demand. 
  

• Develop an agile infrastructure: providing business services that can be orchestrated and composed at the edge in response to the particular forms of demand they are targeting. This then allows the supply-side of a business to extract economies of scale or scope when providing support across multiple business models.

SOA as Multi-Sided Platform

One of the ways to think about the complexity of SOA is as a multi-sided platform.

Some of the pioneering work on multi-sided platforms has been published by Andrei Hagiu at the Harvard Business School.  (Follow links from his homepage to some of his recent papers.)

In November 2006, I posted a brief commentary on Two-Sided Markets, referencing his work, and indicating its relevance to a service-oriented business strategy.

As yet, relatively few people have made the connection between multi-sided markets and SOA. In June 2007, Richard Friedman posted something useful on Multi-sided Platforms for Business or Software, and I found a paper entitled Optimizing the Supplier Selection and Service Portfolio of a SOA Service Integrator presented to a 2008 conference by a group of German researchers.

One of the attractions of SOA is that it should allow people and organizations to collaborate more effectively and cost-effectively. From the supply-side perspective, this means collaboration between the users of your platform. Your platform may or may not support a rich and open variety of collaborations, including mashups and other third-party initiatives, and this richness and openness significantly affects the demand-side value of your SOA platform.

The critical economic question here is not the economics of scale on the supply-side but the economics of scope and agility on the demand-side. Thus the critical question for platform design is how open/closed these platforms are, and the extent to which they constrain (overdetermine) or enable (underdetermine) demand-side activity.

Motoring as a Service

Listening to Power Drive, a BBC radio programme on electric cars. (I heard the live broadcast yesterday evening, and I have now downloaded the podcast from the BBC website to listen again).

I fully expected to hear the voice of Shai Agassi, and I was not disappointed. Until a couple of years ago, Shai was the rising star at SAP: the founder of Netweaver, the champion of service-oriented architecture (SOA) within SAP, frequently talked of as a future CEO. Then he suddenly quit the software industry to work on electric cars.

Shai was one of the first software executives to get the concept of business as a platform of services. (See my post dotBiz from January 2005). He is now talking about motoring as a service, with what he calls a platform-based approach to create a new business model. Shai's company Better Place is building a network infrastructure for rapid charging and battery replacement. (Coverage from about 17 minutes into the BBC programme.)

Shai makes five important points about a service-based approach to motoring.

• Establish a separation between car and battery - when you reach a charging spot, you swap your empty battery for a fully charged battery.

• Don't solve mileage problem by bigger batteries but by better infrastructure - put charging spots closer together.

• We're getting the infrastructure right before we expect people to buy the cars.
  

• Motorists pay for real service (mileage not car)

• Shift the industry, not one car at a time. Car-makers should be able to make more profit with electric cars than gasoline-based cars.
  

The business model is copied from the mobile telephone business. The consumer has a choice between a pay-as-you-go model and a contract model. You can buy a low-mileage contract or an unlimited mileage contract. If you are willing to sign a 24 month contract, you get a better deal for your miles, and you may find a supplier willing to give you a free car.

Of course, this is only economically viable if you can get a large-scale adoption of the new technology. Shai talked about computer simulation models they are using to calculate the business case for a whole country (in terms of reduced oil imports) and to plan the distribution of capacity.

"You're still a software person at heart." says the interviewer and Shai agrees. "At the core of this is a huge software system", he says.

See also Shai Agassi: A bold plan for mass adoption of electric cars (TED Talks)

Business Value from SOA - Sharecropping

This post starts by talking about the value proposition of Web 2.0, and then makes some more general points about the distribution of value in a layered system-of-systems.

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A couple of years ago, Nick Carr suggested that a lot of Web 2.0 business was akin to sharecropping. The platform (MyFace or FlickTube or whatever) owns the space, and the users grow the content.

• Nick Carr, Sharecropping: The Long Tail, The Sharecroppers' Tools
• D'Arcy Norman, On Social Network Sharecropping, Sharecropping Clarification
• Jesse Vincent, Web 2.0 is Sharecropping
  

I think the most interesting aspect of this metaphor is the idea of a stratification of value, with different value proposition in each stratum. As Nick puts it "sharecroppers operate happily in an attention economy while their overseers operate happily in a cash economy".


Some people interpreted this as implying some kind of exploitation, and there have been vigorously defensive rebuttals of Carr's suggestion.

• Ed Felton, Sharecropping 2.0? Not Likely
• Mike Masnick, Are Sites Like Digg, YouTube And MySpace Still Exploitation If People Get What They Want?

Ed and Mike both insist that there is a connection between the attention economy and the cash economy. And this connection is evident from the success of Second Life as well, where there is a reasonable stable rate of exchange between virtual money and real money. For that matter, there is even a rate of exchange between virtual crime and real crime [Woman in Jail Over Virtual Murder].

But Nick isn't denying a connection between the platform provider's value proposition and the platform user's value proposition: indeed he too insists they are connected, but also points out that they are different.


Tim Bray had previously used the sharecropping metaphor to refer to independent developers building applications on major platforms. Here too we have a complex layered ecosystem, in which different stakeholders build value in a positive-sum game, but with some significant trust issues arising from the asymmetric relationships.

• The Web's The Place
  

Let me end my making a more general point, which I think is applicable to all kinds of layered systems-of-systems and not just Web 2.0. In a stratified ecosystem, there is at least the possibility that value is created by a platform provider, and that another kind of value is provided by the platform user, and that these two kinds of value interact in a complex way. Clearly we would like to know what kinds of stratification are most conducive to value creation, and this is a fascinating architectural question with no easy answers.

Banking as a Platform 2

Last week in Banking as a Platform, I discussed how banks might use the platform concept (for example as discussed by Tom Steinthal in a post called Some Thoughts on Platforms in Financial Services) to support radical improvements in customer experience and service.

Tom has now replied. In a post called Platforms - Are They Coming, he mentions a banking product called PNC Virtual Wallet. [PNC Bank Takes on Mint & Quicken with PNC Virtual Wallet, NetBanker, July 14th 2008]

The NetBanker article mentions several companies offering financial management platforms that apparently sit on top of (and aggregate) online services from regular banks. These financial management platforms include Geezeo, Jwaala, Mint, Wesabe. I haven't studied these in detail, but from a quick review of the material on their respective websites they look fairly similar, and a lot more like real platforms (according to the criteria stated in Tom's earlier post) than PNC Virtual Wallet. Although PNC deserves some praise for innovating at all, I can't see anything very radical in the PNC innovation.

Among the comments to the NetBanker article, I note contributions from Aaron Patzer (CEO of Mint) and Andrew Taylor (CTO of Jwaala). This is not the first time these two have clashed in public: in September, Andrew put a post onto the Jwaala blog called Hi I'm Mint. Ugg., which prompted a robust reply from Aaron.

Behind the rivalry between Mint and Jwaala is a fundamentally important difference in platform strategy. Mint appears to be selling to customers - "use our platform to get a better service over and above your existing bank accounts and other financial service providers". Whereas Jwaala appears to be selling to banks - "use our platform to provide better services to your customers". (Back in 2005, I noted a similar dilemma for software billing specialist LaCayla - whether to market its services upwards or downwards. There are some complex questions of platform strategy here, as I indicated in my post on two-sided markets. There are also questions of trust.)

I really hope that innovations like these are successful, but there is a lot of work to do. Big banks like PNC may offer a watered-down and "safe" version of the innovation, but they might possibly have mixed feelings about the outcome. Meanwhile we can expect a lot of exciting stuff to be produced by small energetic companies with disputatious senior management; but it will be interesting to see how far they get with or without the active collaboration of any of the big banks.