How to steal a platform for $50m

Machine Platform Crowd” by Andrew Mcafee and Erick Brynjolfsson explains how digital platforms are reshaping economies.  Lets use the book’s concepts to understand one of the greatest tech heists in recent memory — how Google used Android to steal the mobile phone platform market from the phone manufacturers.

In 2005 Google bought Android, a startup about which little was known, for approximately $ 50 million. The technology blog Engadget commented at the time that “we only have the faintest idea why Google just bought Android, a stealthy startup that specializes in making ‘software for mobile phones.’ ”

Within a few years, though, the value of a robust alternative to Apple’s platform for apps became quite clear. In 2010, David Lawee, a vice president of corporate development at Google, said it was the search giant’s “best deal ever.” – Machine, Platform, Crowd

Mary Meerker’s 2017 Internet Trends report shows that even as late as 2009 Android was statistically insignificant in mobile phone market share.  The primary market share for phone operating systems were those issued by manufacturers (the “Other” category).

Screenshot 2017-09-03 11.03.20
Source, Mary Meeker Internet Trends, March 31, 2017

Yet last year Android exceeded 80% share and, more importantly, drove significant revenue for Google.  In 7 years how did this turnaround happen making the $50m acquisition look brilliant?

Its because, unlike Nokia or Blackberry, Google realized mobile phone operating systems needed to be platforms not just phone firmware with a dusting of a user interface.  That Android is ‘free’ seems to be important but its more accurate to say “Android had multiple, alternative, delayed, monetization approaches”.  And through those alternative monetization strategies the hardware manufacturers were abstracted, Android adoption soared and Google’s value increased exponentially.

This is what digital platforms do — 

They twist the value proposition by emphasizing complimentary goods (apps, interaction with other services, etc.) and the inexpensive cost of duplicating digital goods.

Android succeeded because it addressed the previously high transaction costs of making phones more useful.  It addressed the demand side of consumers using phones – anyone who ever tried to install an application on Blackberry or Nokia phones will recall how painful it was and how poor the applications worked.  In fact anyone who ever used a Nokia or Blackberry phone probably only used the applications pre-installed by the phone manufacturer.  (Who else remembers playing Snake on a Nokia because it was the only option?).

The friction of increasing the phone’s utility was too high and it resulted in a phone only being a phone.  And this created an opening.

Android’s cleverness was it unbundled application creation from the phone manufacturer and reduced the friction of finding and installing new applications.  Android turned phones screens into a marketplace where the consumers could personalize their experiences.  In exchange for this Google monetized some of the applications and wrap around services (data, etc.).

In parallel as Android gained users it improved its supply side too.  It because more and more useful for developers because they had a single platform to develop and a virtually free distribution platform.  This in turn attracted more consumers which attracted more developers forming the exponential growth chart in Mark Meeker’s report.

This could have been predicted by applying the principles Andrew Mcafee and Erick Brynjolfsson outline in their book.

A key point in the book is generating disproportionate economic value requires a platform because platforms are the center of everything.  

 

This also means if you are not the platform then you pay some of your economic value as a tax to whoever runs the platform.

Participating on the platform, rather than being it, is not inherently a bad thing.  Only a handful of platforms can exist before they become too dilutive.  Most companies will be nodes on the platform benefiting from lower distribution costs and the ability to manically focus on their product.

However when a company is a platform node they must realize the power they are giving the platform and appreciate the long-term implications.

In 2009 the mobile phone manufacturers were the platform and Google’s $50m acquisition was hardly a story.  But because Google saw how to create a platform they shifted the power from manufacturers relegating manufactures a platform node rather than being the platform.  And the economic results of hardware manufacturers and Google tell the story of how that went.

Andrew Mcafee and Erick Brynjolfsson’s book explains in more detail why this happened including enabling steps such as increasing machine power, assembling crowds, and the pricing of complimentary goods among other points.  The book’s discussion of demand curves and transaction is especially useful and I highly recommend skimming through that.  While focused on digital platforms I believe the book’s concepts could be applied to any number of industries.  For example Wal-Mart is a platform for CPG companies;  Cities are platforms for governments; etc.

If you are interested in my favorite passages please check my Twitter Feed and where I posted passages tagged #MPCBook.  While we all eagerly await their next work please leave me a comment and read their book today!

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