Power to the People: Why Ownership Hurts Businesses and Open Platforms are the Future

The Battle of the Platforms

In recent years, many business areas have become battlegrounds where various platforms compete to become the most adopted standard. These platforms are often attributed to generating additional business opportunities for peripheral participants and organisations. Furthermore, the overall customer value is improved when these auxiliary players begin to offer an assortment of complementary services and products that can be used within the platform environment. The combined effect of this healthy competitive environment and large user base is to promote open innovation. There is no doubt that these platforms are powerful, but are some platform structures or strategies inherently superior in the long run?

In this blog post I will put forth an argument that platforms which encourage openness, free participation, collaboration and increased interoperability between consumers, individuals, organisations and companies will have a stronger foundation compared to platform systems that are more closed. In essence, proprietary practices and attempting to lock-in users behind a “walled garden” can hurt businesses and the future lies in open platforms that promote ecosystems of network activity. Firstly, this blog will attempt to clarify some definitions surrounding open and closed platforms. Then, I will argue that in an ideal world, all platforms would be completely open and based on open source software or freely available patents. Next, a counterargument will be presented to explain how “walled gardens” can be a strategically superior option, at least for some companies and in the short term. Finally, a compromise will be proposed that combines closed and open practices to give the best balance between company control and end-user value.

Open Platforms versus Walled Gardens – Definitions

When staring up a new platform business or when evaluating the strategic opportunities of an existing service, a decision usually has to be made as to whether the platform should be open or closed. Open platforms are characterised by interoperability and collaboration between different products, programs or systems from different vendors. A closed platform or a “walled garden” approach involves constructing “fences” around consumers to lock them into the platform. Thus, the service provider can obstruct unapproved content from reaching the user and can control complementary applications and how they are used. Platforms usually involve a wide range of contributors and according to Eisenmann et al. (2008) there are four distinct roles of platform participation:

  • Demand side-users, usually referred to as the end-consumers
  • Supply-side users, who provide services and applications on top of the platform
  • Platform providers, who distribute the platform and serve as users’ main point of contact with the platform
  • Platform sponsors, who hold property rights over the platform and are responsible for developing its technology

Each of these functions or roles can be either closed or open. There are different levels of openness, but in general an open platform will encompass some or all of the following features:

  • Open usage. The platform is open for participation in its development, capitalisation and use, and any restrictions are reasonable and non-discriminatory
  • Open scope and adaptation. Developers or users are able and allowed to create and implement functionality that the platform was not originally meant to have. Alternatively, developers can replace, change or remove existing functionality
  • Open architecture. A system or product where participants can openly see and understand how it works, thus enabling them to build for it or on top of it
  • Open source. The source code of the platform is accessible with a recognised open source licencing model

As it can be seen, there are many ways in which a platform might be considered open. For example, the Linux platform is open with regards to all functions. Anyone can use it or develop and offer Linux-compatible software applications, Furthermore, the Linux operating system (OS) can be bundled with servers or personal computer hardware components. And finally, any organisation or individual can contribute improvements, make changes or add features as long as it complies with the rules of the open source community (Eisenmann et al., 2008).

In comparison, for products such as the Xbox, you only have platform openness on the user side. There is an argument that the even the openness of the user side of Xbox is limited. End users are not allowed to freely tinker with the hardware as this would void the warranty on the product and game developers are restricted to publish games that fulfill the user agreements set by Microsoft, whilst third-party Xbox applications can be rejected due to strategic concerns.

In between the extremities of the open Linux OS and the relatively closed Xbox, there are numerous companies, products and services that display a varying degree of openness. Clearly, there are many types platforms that are successful, both open and closed, so it is important not to make generalised statements about the appeal of one method over the other. However, are there some platforms that are more likely to succeed in the long term by creating powerful networks and ecosystems of services and products, and can some of these platform models be considered superior beyond just the measure of company profitability?

The Argument for Open Platforms

First of all, there’s a strong argument for why completely open platforms are superior in terms of value for the end users, but also for facilitating network effects and promoting innovation. The type of platforms we are talking about here usually use open source to construct its underlying software, and the source code is freely available to anyone. In addition, anyone can participate in the development of the platform, subject to certain rules and obligations set by the open source community. Open source gives empowerment over the development process, but also of the use of the service or product. In good science all knowledge is free, and all knowledge is shared. The community as a whole will benefit from having access to the information and will be able to help improve the software and ultimately the platform itself.

Creating “walled gardens” is the antithesis to ideals of open source and open platforms, and closed platform strategies and excessive control of ownership can significantly damage brands. For example, Facebook is a relatively closed ads platform with respect to the demand-side user role (in this case, the users are people/organisations wishing to advertise on Facebook) and there has been little transparency in terms of how Facebook collect, use and sell its consumer and advertisement data to various organisations, which led to the recent data scandal. This does not necessarily suggest that Facebook should completely open its software code, but they could certainly benefit from being more open in terms of how it collects and distributes data.

Complete openness down to the source code level is not always needed to promote an open and thriving platform ecosystem. Often, it’s enough for platforms to open its architecture or application programming interface (API). For example, some people predict that the future of banking and finance will involve a wide variety of third-party developers who can use bank API’s to create apps and services for end-consumers. It’s useful to think of these entrepreneurs and start-ups as partners or collaborators instead of direct competitors of the banks themselves. In this scenario, network effects create additional value to customers, which can in turn be captured by the banks who provide the platform. Banks that fight against this trend might secure greater control in the short term but is likely to suffer or become obsolete as the market moves forward. Capitalism is crucial, but It’s important to avoid rent-seeking and monopolistic behaviour where you are making money by impeding technological progress just because you have market control (e.g., car manufacturers lobbying against electrification). Open systems can act as catalysts for entirely new business areas that can be built on top of open platforms. For this to happen, there must be a fundamental agreement and idea of freely and openly exchanging ideas to drive progression.

Wait, What? How Can We Make Money if Everything is Open and Free?

A potential concern, at least from a business standpoint, is how can individuals and companies make money on open source projects and platforms. Well, there are a few options available for firms. Firstly, let’s assume that the altruistic and ethical motivations for engaging in open source software is not enough to convince most organisations and companies to participate (although this is not really true). After all, employees have to be payed, the company needs to grow, dividends must be distributed and so forth. So, one way for companies to generate revenue through open source platforms is to sell applications, products and services that support the platform. Alternatively, businesses could opt for hybrid models, where additional proprietary products are sold. A version of this can be seen in WordPress, where the base platform is free, but users are given the choice to purchase premium licenses with increased functionality. These are all valid monetisation strategies, but they can sometimes be difficult to implement.

Providing a completely open source platform might be a little bit more complicated and nuanced than what it initially seems. Some have suggested that open source solutions mean freely sharing the intellectual capital of a company, country or region, and that this could compromise the economic engine that advance societies and instead send growth and jobs overseas. For example, in the robotics industry there are concerns that open source robotic operating systems (ROS) could enable an offshore commodity conglomerates to seize and overtake a potentially prosperous American/European market. The counterargument is that unprotected and open source ROS prevents people from having to re-invent cross-science elements of robotic technology, thus minimising the duplication of innovation efforts and perhaps reducing the overall time to market. However, the problem of retaining business intelligence and competitive advantage compounds when attempting to develop platforms for defence, aerospace or cyber security organisations, where, for obvious legal and safety reasons, the platforms have to maintain a large degree of control. Thus, considering these issues, one might begin to ask if there are situations where closed platform systems are preferred. In fact, if companies gain increased levels of control and in general have more ways of monetising its platform, then surely closing or constructing “walls” around certain aspects of its platform is the better alternative.

Embracing Closed Systems or:

How I Learned to Stop Worrying and Love the Corporation

There are many reasons a company might wish to keep its platform closed (Eisenmann et al., 2008). Firstly, it protects the company against being unwillingly targeted for interoperability. This is particularly important if the company’s strategy is to develop and provide certain key complementary applications to the platform. Secondly, a platform leader might consider implementing “walled gardens” to deter entrants and increase the switching costs for both end-users and application developers. And of course, companies often opt for closed platforms when they wish to protect intellectual property or provide a more secure and controlled environment for its end-users. Finally, platforms that are more closed will usually give a company a wider range of monetisation options.

Clearly, closed systems can work and is a viable platform strategy for many companies, for both start-ups and mature services. For example, one of the largest companies in the world today is Apple, and their platform products (especially the iOS) locks consumers into a proprietary ecosystem. Yes, there is a variety of applications available to users through the App Store, but these are generally heavily regulated and are ultimately controlled by Apple. There are many opponents to such business practices. For instance, Zittrain (2008) argues that closed networks lead to “sterile, tethered devices” and that companies should rather embrace open platforms and trust the wisdom of crowds. He suggests that companies should pursue policies of making “generative” devices and services that allows users to adjust, improve and augment platform functionalities. Renouncing generativity in favour of the control and security offered by “walled gardens” will carry significant social costs according to Zittrain. However, as others have pointed out (here and here), open platforms can sometimes lack a clear sense of direction or vision, and occasionally end up as a hotchpotch of independent applications. Apple, on the other hand, has delivered a streamlined platform experience to its customers.

Overall, it is hard to argue against the undeniable success of companies such as Apple, SAP, Xbox and others. It is evident that closed systems can be a good option if a company wishes to effectively control and monetise its business, or to simply stave off competing platforms. However, Mehra (2011) goes further to suggest that “walled gardens” can actually be creative paradises under the right circumstances and that they are not necessarily there to lock-in consumers but rather to protect the user dynamism of the platform. To clarify, Mehra considers user dynamism to be mass user-generated content and innovation. He believes the magnitude of user dynamism’s contribution to platform value is not fully understood and, if anything, is largely underappreciated. In his view, “walled gardens” can help protect user dynamism from opportunism and can prevent the investments made by users from being appropriated, which could potentially discourage future user dynamism. An example of appropriation of user investment can be found in the Compact Disc Database (CDDB) project, one of the earliest examples of mass content creation. The project changed in 2001 from being freely open to anyone to being licensed and sold under the name Gracenote. One example of where “walled gardens” are implemented to protect user dynamism can be seen in how Facebook deletes hate posts and bans racism on its platform. From this perspective, the “walls” or the regulations of the platform are not a negative, but there to protect the “garden” or user experience of the platform. However, despite these potential benefits for companies, completely closed systems often miss out on the highly desirable ecosystem effects that can be seen in more open platforms. Is there perhaps a way to combine the best of both worlds?

A Possible Compromise – Partial Openness

Perhaps the best solution to the conundrum of open vs closed to reach some form of compromise. This could happen through companies that offer varying degrees of openness (or “clopen” systems) or through having representative companies of each extreme. For example, Eisenmann has suggested that markets may evolve to favour the existence of one strong open platform and one strong closed player (e.g., Windows vs Linux, iPhone vs Android etc.). In that situation, the society, economy and end-users get the best of both approaches.

In addition, there are many instances of companies realising the power of networking and interoperability effects in open platforms. For example, Sony’s PlayStation has previously been a fairly closed system, but recently Sony has somewhat changed its practices and shifted its platform strategy to include some open source software and projects for the PlayStation 4. In addition, Sony has experimented with the idea of further opening up its platform by removing some of the restrictions imposed on both developers and users.

A similar trend can be seen in the automotive industry, where companies traditionally use platforms that consists of the chassis, drive-train and motor so that components don’t have to be designed and engineered from scratch for each new car model. These automotive platforms are highly proprietary in the sense that only the companies themselves are allowed to change or develop technology for the platforms, and the platforms are rarely sold or offered to competing firms. However, in recent years Tesla Motors, has built a platform around its transmission and battery technologies and have opened up its patents to encourage more manufacturers to use the Tesla platform.

Open versus Closed – Is it a False Debate?

The question of open versus closed platforms is complicated, and perhaps completely unnecessary. It could be argued that the majority of users do not care whether the platform is open or closed. If the overall service provided by the platform environment is good and as long as the price is reasonable (or ideally free), then customers and developers will flock towards the platform, regardless of its structure or business model. Thus, it could be argued that the debate is fruitless and that, at the bottom line, it’s strictly down to business. Different platform models and strategies will yield different results for organisations depending on the industry, its rivals and the capabilities of the organisations. The question should perhaps not be whether to develop an open platform or “walled garden,” but rather when and how should the company adjust its platform strategy in relation to its current market position. The crucial step then becomes selecting the optimal level of openness.

Conclusion or Why You Should Ignore Everything I Just Said and Support Open Platforms

This blog post has attempted to clarify the definitions of open and closed platforms, and then discussed the merits of each platform model. It was argued that although open source platforms might be considered a more altruistic and consumer centric approach, there are many reasons why businesses might opt for closed systems. It was then suggested that the best aspects of both open and closed platform solutions might be combined by companies, and that the true problem statement for organisations is selecting the optimal level of restriction or openness. In this scenario, companies might choose platform strategies depending on its desire for scalability, control, power and monetisation options in the current business environment.

But then again, is that really the world we want to live in? A world where profit margins, market leader positions and strong-arming both consumers and co-developers dictate the strategic directions that businesses undertake. Surely its more desirable to promote platforms that are transparent, flexible and interconnected, which gives users total freedom. Are these ideals realistic? No, not really. Companies will always exist, and they will always attempt to make as much money as possible. And they should, they have the prerogative and freedom to do so. Yet, there is a huge difference between companies that deliberately close their systems to achieve greater levels of control, which in effect deliberately destroy potential value for customers, as compared to companies that willingly open up to create a greater collaborative ecosystem between the various platform participants which will ultimately stimulate open innovation and large-scale progression. I know who I’d support, and I believe that over time, most consumers will gravitate towards the platforms that will offer them not just the best platform experience, but also the freedom to engage with that platform however they might wish.

 

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