The Platform Leader’s Dilemma

Platform leaders are companies that do not just sell standalone products. They have a foundation technology that is sufficiently open so that outside firms can provide complementary products and services, ranging from prerecorded videotapes to software applications and downloadable digital content. The value of the platform and complements can grow exponentially with positive feedback loops. These "network effects" make the platform, and the complements, increasingly valuable (and profitable) as more users, application developers, service providers, content providers, device makers, and other ecosystem players such as advertisers adopt the same platform.

While "hit" products come and go, platforms supported by a global ecosystem of complementors and strong network effects should be more difficult for competitors to dislodge. But, as Annabelle Gawer and I noted in our book Platform Leadership, even the best firms face a common dilemma best described by Clay Christensen in his book The Innovator’s Dilemma: Their success makes it difficult to change, even though their technology must evolve or become obsolete.^a As new platform wars emerge around mobile phones, video games, cloud computing, and social networking, it seems like a good time to reflect on some past examples of platform leadership and draw some general lessons. In this column, I begin with a few companies we all should know well: IBM, JVC, Sony, Google, and Nokia. Then I turn to Microsoft and Apple.^b

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IBM

This venerable company created the first global platform in the modern computer era, based on the IBM/360 mainframe software introduced in the mid-1960s. Antitrust initiatives pressured IBM to release information to independent maintenance providers. This eventually led to an ecosystem of hardware "clone" makers like Amdahl and Fujitsu as well as software product and service companies focused on IBM customers. But IBM had the deepest knowledge of its market. It had sold primitive electronic computers since the early 1950s and for decades before that dominated in electromechanical tabulating machines and other office equipment. In the 2000s, IBM still rules the mainframe world and does pioneering work in high-performance computing (consider the Watson computer system that beat the "Jeopardy!" game champions). But enterprise computing has evolved to a much more heterogeneous world of machines and software of different shapes and sizes.

To their credit, by 1980, a few key IBM executives had realized that a platform shift was occurring and they introduced their own personal computer design in 1981. The operating system and microprocessor turned out to be the two key components of this new PC platform, and IBM ceded control over these elements to its suppliers, Microsoft and Intel. To its credit again, though, after absorbing billions of dollars in losses, IBM found a way forward. Under new CEO Louis Gerstner, hired from RJR Nabisco in 1993, it became the champion of "open systems" (Linux, Java, the Internet, ubiquitous computing, and the cloud). Gerstner and his successors also sold off commodity hardware businesses and rebuilt the company around services and middleware that help customers utilize different technologies.

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Google has challenged the modus operandi of the computer industry—proprietary technology.

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The lesson here? Platforms inevitably evolve and the leader of one generation may lose control over the next. But all is not lost if the erstwhile leader truly has distinctive capabilities that keep it linked to its customers. In this case, IBM had decades of experience that helped it understand—like no other company—the data-processing needs of enterprise users and other large organizations. This is where the firm kept its focus. The shift in platforms away from the mainframe and the loss of control over the PC were both highly damaging financially. But these changes created a new beginning for a service-oriented IBM.

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JVC and Sony

In the 1970s, VCRs became the highest volume consumer electronics product as everyone with a television set became a potential customer. Sony actually won the race to create a viable home-video recorder but JVC ended up as the market winner. Several Japanese firms studied Ampex’s technology for broadcasters in the late 1950s, and both JVC and Sony found ways to miniaturize and improve the technology for the mass market. They beat out their rivals in Japan, the U.S., and Europe. Sony introduced the Betamax in 1975 and JVC countered with the VHS in 1976. By 1978, however, VHS had passed Betamax in sales. It became a global platform in that JVC licensed the VHS technology widely, allowed other companies like RCA and GE to influence feature development (mainly recording time), and cultivated a large set of outside firms for video content and distribution. Sony may have built a better product and was first to market, but it did not do as good a job cultivating ecosystem partners. JVC went on to become a multibillion-dollar company, based mainly on the VHS platform. It must also be noted that, while it diversified from audio and video to computer storage products, JVC never dominated another market. Today it survives after merging with another Japanese audio equipment producer, Kenwood.

Compared to JVC, Sony always has had broader technical skills and deeper pockets. After the Betamax experience, it also learned to cooperate better with other firms when it came to digital video standards, the PlayStation platform for video games, and its Bluray format for DVDs. But both Sony and JVC failed to grasp how new software and networking technologies were changing the world of consumer electronics. The Walkman, for example, introduced in 1979, brought enormous revenues to Sony while the Betamax gradually faded to zero market share (for consumers) by 1989. Two decades later, Sony had the technical skills as well as the content to evolve the Walkman into a new type of platform, like Steve Jobs did with Apple’s iPod and then the iPhone. But Sony did not have the visionary capabilities of Apple and chose instead to focus mainly on standalone hardware products.

The lesson here? Platform leaders must prepare for the future, even when they are focused and highly successful with their present businesses. This means creating a flexible and creative organization, with people who can learn about new technologies and markets. Companies also need to nurture deep, enduring skills, such as by understanding how to marry high technology with consumer electronics. JVC could have done better after the VCR era had it evolved its skills more quickly from analog to digital technology, and then to networked systems and hardware driven by software, rather than software driven by hardware. Sony faced the same challenges and did slightly better but not good enough. Though it still makes Walkman multimedia devices as well as PCs, smartphones, and video game consoles, and owns its own music label and movie studio, Sony continues to look for hit hardware products and always seems to find itself trailing in the newer platform markets.

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Google

Google’s platform was initially the Internet, based on a better search engine. But Google made its technology nearly ubiquitous on PC desktops with the downloadable and free toolbar. It then built an Internet portal, replete with email, maps, applications, storage, and other features, to surround and feed the search engine. Google monetizes its leadership position by selling targeted ads that accompany searches. But Google has not stopped there. The company realized years ago that most computing would one day be on mobile devices. So Google bought and then refined the Android operating system (which is based on Linux) and created the Chrome browser to facilitate mobile computing (and mobile searches as well as advertising). Google is now the largest smartphone OS provider and plans to challenge Apple directly by acquiring Motorola’s mobile phone business. But not even Google has done everything right. It was slow to see the importance of social networking. It has been trying for years (with limited success) to challenge Facebook and create a coalition of partners to gain access to more social networking and social media content—again, presumably, to sell more search and advertising.

The lesson here? Again, platform leaders must force themselves to think broadly about their platforms and business models while extending their technical and marketing capabilities. Google has always focused on search, but computing has been moving beyond the desktop for years and even beyond the Internet—to multiple devices as well as applications and content that reside within both open (such as the Internet) and closed (such as Facebook) networks. Moreover, Google has challenged the modus operandi of the computer industry—proprietary technology. Its software platform for mobile phones and other devices such as Netbooks and tablets is both free and open. It is difficult for companies that charge for their technology and do not have large advertising income—like Apple and Microsoft, as well as Nokia—to beat free and open.

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Nokia

This Finnish company remains the largest producer of cellphones, and its Symbian software has been a dominant platform for basic handsets. However, mobile sales are quickly moving to smartphones that require more sophisticated software. Not surprisingly, Nokia has seen its market share, market value, and financial performance suffer dramatically as RIM’s BlackBerry and Apple’s iPhone handsets, and a variety of devices from different companies running Google’s Android software, have come to dominate the market. Nokia removed its CEO and is now led by a former Microsoft executive, Steven Elop, who recently announced plans to abandon the Symbian operating system as well as another joint OS project with Intel. Instead, Elop wants to use Microsoft’s Windows phone software for Nokia’s next generation of smartphones.

The lesson here? Once more, we see that platform leaders must be prepared to evolve and even discard their technologies and sometimes their business models as well. If they fail to develop new technology internally or find suitable acquisitions, they may well find themselves adopting the platform technology of a competitor. We shall see what happens to Nokia, but the future does not look very bright.

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Microsoft and Apple

Steve Ballmer, Microsoft CEO since Bill Gates handed over the reins in 2000, is often criticized for not being able to move much beyond the PC platform. Indeed, Windows desktop and server and the Office suite still account for nearly 80% of Microsoft’s revenues and almost all its profits. Ballmer is under particular pressure because Microsoft’s share price is lower today than it was a decade ago (though this is also true of Intel, Cisco, Nokia, and a host of other high-tech firms). And archrival Apple, despite the small (but rising) global market share of the Macintosh personal computer, and despite its near bankruptcy only a few years ago, has been growing at 50% a year and vaulted past Microsoft in market value during 2010. Apple is growing so fast because it has become a major player in consumer electronics as well as cellphones and digital content distribution. On the strength of its high-margin digital service platforms (iTunes, App Store, and iCloud), Apple may someday match or surpass Microsoft in profitability. Reproducing digital bits is much less costly than reproducing hardware boxes.

But we tend not to give Microsoft enough credit for its accomplishments. It remains the most profitable of the high-tech giants, including Apple and Google. It has survived radically disruptive technological transitions and daunting business-model challenges (character-based to graphical computing, the Internet, the Software as a Service model, cloud computing, mobile computing, and social networking). It has survived antitrust scrutiny and violations (remember Netscape?). Nevertheless, Microsoft continues to "print money," relying on the enormously profitable gross margins of the packaged software business. And change is always in the works at Microsoft, albeit slowly. Billions of dollars in losses ("investment") from MSN and Bing over the past 15 years has prepared Microsoft for the online world funded by advertising revenue. It learned from the Longhorn/Vista debacle how to break up Windows into smaller, more manageable chunks, which can also help deliver new Internet and cloud services. Its Windows Azure cloud offering and SaaS versions of some products have had good receptions in the marketplace and are competitive, though not dominant.

What Microsoft needs to do is what IBM, Google, and Apple have done—evolve beyond the slow-growing PC industry and move to newer, fastergrowing markets, as well as integrate the new technologies. Microsoft’s decision in early 2011 to buy Skype is one move, although an expensive one, to get access to new customers. Other moves include Microsoft’s alliance with Nokia to take over its future smartphone software and an earlier alliance with RIM to take over the search business on the BlackBerry smartphones. An even bolder move would be for Microsoft to convince RIM to replace its aging operating system with Windows and combine this business with Nokia’s smartphones.

The lesson here? Platform leadership can be both a blessing and a curse. Gates’ major mistake (back in the late 1990s) was probably to insist that Microsoft remain a Windows company, rather than become a broader platform company. Microsoft engineers tried to force Windows onto the new platforms, the Internet, and then mobile phones, rather than create optimized software from scratch and then link the new platforms back to Windows. Microsoft also cut down Windows for the Xbox, but did not retain Windows compatibility. Of course, Windows on the desktop is the modern-day equivalent of a gold mine. It is not difficult to understand why Gates and Ballmer have been so reluctant to cannibalize this business. Apple, by contrast, was never wedded to the original Mac platform, which failed as a business in the 1980s and 1990s anyway. It later replaced the first Mac OS with NeXT software, which was based on Unix. But Apple did remain wedded to its remarkable capabilities in user interface design and visionary product innovation. Those skills are the basis for Apple’s business success with the iPod, iPhone, iTunes, and iPad and its remarkable transformation into a global platform leader on multiple integrated devices. But we shall need a few years to see how well Apple copes with it own platform leader’s dilemma.

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