When Tech Companies Compete on Their Own Platforms
One common complaint from third parties about platform businesses is that they see what succeeds on their platforms and then enter the most profitable areas themselves, often decimating third parties in the process. Studies have identified several motivations for platform-owner entry beyond just value capture. Multiple studies have suggested that platforms opt to enter directly in order to improve quality, for example. And the effect of platform entry on complementors is mixed. Some studies found that platform entry can create positive spillover effects on third parties and increase their demand. However, a few other studies find that the impact of entry on complementors can be negative. Google’s introduction of flights into its search engine decreased clicks on other organic results, for example. Careful empirical analysis is needed before policy intervention.
If you want to monitor how your kids spend time on their tablets or smartphones, Apple now has an app for that. But what about the apps that already existed to monitor screen time? “Over the past year, Apple has removed or restricted at least 11 of the 17 most downloaded screen-time and parental-control apps,” according to an April report by The New York Times. Earlier this month, Apple reversed its policy, allowing these apps to use two technologies previously cited as grounds for their removal from iPhones.
The removals fit with a common complaint from third parties about platform businesses: they see what succeeds on their platforms and then enter the most profitable areas themselves, often decimating third parties in the process. U.S. presidential candidate and Senator Elizabeth Warren has even proposed a policy remedy to combat it. In this proposal, she identifies the central issue:
Using Proprietary Marketplaces to Limit Competition. Many big tech companies own a marketplace — where buyers and sellers transact — while also participating on the marketplace. This can create a conflict of interest that undermines competition. Amazon crushes small companies by copying the goods they sell on the Amazon Marketplace and then selling its own branded version. Google allegedly snuffed out a competing small search engine by demoting its content on its search algorithm, and it has favored its own restaurant ratings over those of Yelp.
Warren’s proposal would prevent online marketplaces with $25 billion or more in annual global revenue “from owning both the platform utility and any participants on that platform.”
But how often do platforms enter directly into competition with their participants? And what happens to the participants when the platform enters their product spaces? Last year I published a review of the empirical studies that have been done to date on this issue and concluded that both the motivations of the platform entry and the impact are nuanced.
Why does Apple make its own apps rather than depending on third parties? Why does Amazon decide to sell something itself if its third-party sellers already offer it in its Marketplace? Why does Google offer its own restaurant reviews? Why did Twitter acquire the real-time video streaming service Periscope? In each of these cases, the product in question was a complement to the platform — its existence made the platform more valuable. The textbook explanation for why a platform owner should provide some of these products itself is that these complementary applications help solve a chicken-and-egg problem: Without an existing base of platform users, no complementors would be interested in supporting that platform; and without complementary applications, no consumers would be interested in adopting the platform. But that doesn’t explain many of the examples above because in each of those cases the platform had already taken off.
Studies have identified several motivations for platform-owner entry beyond value capture.
Multiple studies have suggested that platforms opt to enter directly in order to improve quality. For example, Apple may have thought that it could do a better job at monitoring your screen time. In one of my own papers, we looked at the timing of Google’s introduction of its own flashlight app which suggested it may have been influenced by users’ privacy concerns about some third‐party flashlight apps. In addition, given that hundreds of flashlight apps have been developed and many more are expected to be developed in the future, Google’s entry may have reduced wasteful efforts in developing redundant features. In a case study that I co-authored on JD, one of the largest e‐commerce companies in China, we found that the company chose to offer its own products in certain categories in order to minimize counterfeiting.
Platform entry sends a negative signal to third-party providers. The more frequently platforms enter, the less incentive third parties will have to provide complementary products on the platform. In fact, some platforms work hard to make sure complementors believe they’ll be able to make money. Intel, whose microprocessors serve as a platform that enables complementors to build various hardware devices such as memory sticks, network cards, and sound cards, tried to avoid competing directly with its complementors in many of its product lines to make sure that they kept making platform-specific investments to create value for Intel’s platform. However, this dynamic is less true when the complementors don’t make platform-specific investments. Building devices on top of Intel’s microprocessors was costly, which meant firms wouldn’t do it unless they were confident that Intel wouldn’t enter the space after the fact. By contrast, listing products on Amazon involves little cost, which means third-party sellers are more likely to do it no matter what — meaning Amazon might be less worried about discouraging them through its direct entry.
The effect of platform entry on complementors is mixed. Some studies found that platform entry can create positive spillover effects on third parties and increase their demand. This happened with Facebook’s integration of Instagram and with Google’s foray into photography apps. They made more users aware of photo apps and therefore created more rather than less demand for third-party photo apps. Similarly, in the home video console market, the first-party video games released by console manufacturers such as Microsoft, Sony, and Nintendo increased the installed bases of these consoles and subsequently the demand for third-party games.
However, a few other studies find that the impact of entry on complementors can be negative. Google’s introduction of flights into its search engine decreased clicks on other organic results, for example. Amazon’s entry into a product space discourages third-party sellers from carrying the same product. On the Android platform, Google’s entry reduces affected third-party apps’ demand. In the meantime, these app developers’ incentives to innovate were not completely suppressed; rather, they shifted innovation to unaffected categories and new apps.
The biggest limitation of this research stream to date is that it’s largely focused on the short-term effects of platform entry. But from the many studies we have so far, a few key findings have emerged. First, none of the empirical studies I looked at found negative effects on platform users (at least in the short run) because post-platform-owner entry consumers often gain easier access to these complementary services or can obtain them at lower cost. Second, platforms enter for multiple reasons – not just to compete with complementors. Third, the effects on complementors are mixed. Sometimes they benefit from increased demand. But sometimes they simply struggle to compete and might even go out of business. Therefore, careful empirical analysis is needed before policy intervention. Finally, it’s important to recognize that in addition to direct entry, platform owners have other means to capture more value. For example, they can increase service fees or adopt policies to favor third parties that share more value with them. These results don’t necessarily imply that regulation is or isn’t a good idea, but policymakers eager to regulate platform entry should consider the range of motivations behind it and incorporate them into any new rules.
Feng Zhu is the Piramal Associate Professor of Business Administration at Harvard Business School. He studies competitive strategy and innovation in high-technology industries, with an emphasis on platform-based markets.
When Tech Companies Compete on Their Own Platforms
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