Prepared for the IIPS Symposium on

Globalization andJapan’s Science and Technology Strategy
19 – 20 November 2007
Tokyo

Session 2
Monday, 19 November 2007

Strategies for Platform-Leader Wannabes

Annabelle Gawer
Imperial College London

Strategies for Platform-Leader Wannabes

26 August 2007

Annabelle Gawer and Michael A. Cusumano

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I.

Introduction

In recent years, many high-technology industries, ranging from ―smart‖ cell phones
to video game consoles, have become platform battlegrounds. These markets requiredistinctive competitive strategies because the products are parts of systems that combine
core components with complements usually made by a variety of firms. If a leader
emerges and complementors work together, they can form an ―ecosystem‖ of innovationthat can greatly increase the value of their innovations as more users adopt the platform
and its complements. The problem is that companies often fail to turn their products into
industry platforms.
Our previous research focused on understanding the levers or strategic mechanismsthat existing platform leaders use to maintain their positions (see About the Research). In
this article, we focus on the special problems of firms that want to become platform
leaders – we call them platform-leader wannabes. We have seen many hopefulcompanies fail because their platform strategy was too narrowly focused (either ontechnology, or on business). We argue that companies must be able to tackle both thetechnology and business sides of platform leadership otherwise their efforts are doomed
to fail. The technological challenges come under what we previously labeled as Lever 2 –designing the right architecture, the right interfaces/connectors, and disclosing
intellectual property selectively, in order to facilitate third-parties’ provision ofcomplements. The business challenges include what we discussed as parts of Levers 1, 3,
and 4 – making key complements yourself or introducing incentives for third-party firms
to create the complementary innovations necessary to build market momentum and defeat
competing platforms.
Our strategic recommendations consist of two basic approaches (see Table 1). One
strategy, which we call ―coring,‖ tackles the problem of how to create a new platform
where one has not existed before. The second strategy, which we call ―tipping,‖ tackles
the problem of how to win platform wars by building market momentum.1
2. The Platform vs. Product Strategy ChoiceFirst, we need to clarify the difference between a product and an industry platform,and how this misunderstanding can lead to strategic mistakes. Put simply, a product islargely proprietary and under one firm’s control, whereas an industry platform is afoundation technology or service that is essential for a broader interdependent ecosystemof firms. The platform requires complementary innovations to be useful, and vice-versa.
An industry platform, therefore, is no longer under the full control of the originator, eventhough it may contain certain proprietary elements.
Managers sometimes underestimate the importance of deciding early on between
pursuing a product or a platform strategy. This decision matters because the industry
conditions and choices that favor a platform business differ from those that favor a
product business -- leading to conflicting incentives between owners of industry
platforms and firms that assemble proprietary products. In particular, owners of industry
platforms benefit from lots of innovation in complementary products as well as fromcompetition at the overall system level which would bring its price down. Just as2

Microsoft benefits from the competition between products firms Dell and HewlettPackard, they, in contrast, benefit when customers perceive their products as unique, andtherefore do not want cut-throat competition at the product or system level in which they
compete. They would rather see Microsoft face tough competition on computer operating
systems in order to be able to bargain better prices for the OS they will load on the PCs
they sell. So platform firms and product firms generally want to see different industry
configurations.
Table 1: Strategic Options for Platform-Leader WannabesCoringHow to create a new platform
where none existed before

Tipping
How to win platform wars bybuilding market momentum

Technology Solve an essential―system‖ problem
 Facilitate externalfirms’ provision of
add-ons, e.g., throughprovision of open IP
on connectors
 Keep IP closed on the
innards of yourtechnology
 Tip across markets:
absorb and bundle
technical features froman adjacent market

Business
 Create and preservecomplementors’
incentives to contributeand innovate, e.g., bysubsidizing them andreducing their risks
 Protect your main sourceof revenue and profit
 Provide more incentives
for complementors thanyour competitors
 Rally competitors to forma coalition

Failure to decide early between product or platform strategy can result in dangerous
states of strategic confusion (such as in the case of Palm with the PDA, which we shalldiscuss later). Achieving platform status requires specific decisions that govern
technology evolution, product and system design, and business relationships within theecosystem – different decisions from when pursuing a product strategy. Another common
mistake is that managers can simply overlook the platform potential of their products,
such as in the well-known examples of Apple’s Macintosh or Sony’s Betamax video
recorder – both excellent products that could have but failed to become industry
platforms. Apple may be making the same mistake with the new iPhone by limiting its
initial diffusion to only selected telecommunications providers.
But, while the benefits of becoming a platform seem clear, we do not believe that―every product can become a platform‖. 2 To have platform potential, and for thepromoting firm to succeed in platform leadership, we found that a product (or atechnology or service) must satisfy two pre-requisite conditions:(1) It should perform at least one essential function within what can be described as a―system of use,‖ or solve an essential technological problem for many actors in theindustry.
3(2) It should be easy to connect to or to build-upon to expand the system of use as
well as to allow new, even unintended end-uses.
It is possible to test for these conditions. For the first, we can evaluate whether theoverall system could function without the particular product or technology. If the systemcannot operate, then the product does indeed perform an essential function. For example,
the Windows operating system and the Intel microprocessor are both essential platform
components of the original IBM and IBM-compatible personal computer. For the second
condition, the challenge is to test whether a product or a technology is easy to connect to
or to build-upon. A way to do this is to see whether external firms have indeed succeeded
in developing complementary and interoperable products, or have at least started to do so.
Without fulfilling these two conditions, the strategic game of platforms cannot begin. But
they are far from sufficient to win the platform game.

3. Coring: How to Create a New Industry Platform
Coring is the set of activities a firm can use to identify or design an element (it can bea technology, a product or a service) and make this fundamental to a technologicalsystem as well as to a market. From a functional or technological point of view, anelement or a component of a system is ―core‖ when it resolves technical problems
affecting a large proportion of other parts of the system (this simply reflects our previous
pre-requisite Condition 1). Our research also suggests that coming up with platform-like
technologies is easier than coming up with business strategies that encourage partners andcustomers to adopt a particular technology. We also noted that platforms open the overallsystem to new usage possibilities (this simply reflects our previous pre-requisite
Condition 2).
These different uses are essential to the growth of the installed base, but one question
arises: who will develop these new uses? The platform-leader wannabe may have some
application skills and its engineers can certainly design a good platform solely byfocusing on product architecture and interfaces. But a thriving ecosystem will rely on lotsof externally-created innovation. So how can platform-leader wannabes successfully
encourage other firms to join their ecosystem – and develop the essential complementary
applications? That is one of the two essential business aspects of coring: It requires thatthe platform leader create economic incentives for ecosystem members to invest in
creating complementary innovations, and to keep at it over time. Last but not least,
platform-leader wannabes need to protect, just as any innovator firm should, their ability
to profit financially from their innovations. The balancing act – protecting one’s sourcesof profit while enabling complementors to make an adequate profit and protect theirproprietary knowledge – is perhaps the greatest challenge to platform leadership. There isno simple framework on how to do this, but looking at successful and unsuccessful firms
can provide ideas on what to do and what not to do.
a. Examples of Successful Coring4

We know of many cases of coring or attempts at coring in practice. Google is aparticularly well-known and clear example of successful coring in internet searchtechnology and establishing the underlying business model for itself and complementors.
Qualcomm in wireless technology has done very well in coring from a technology
standpoint, though the business side of its ecosystem shows some signs of instability. In
contrast, General Motors with its OnStar mobile communications technology and EMC
with data storage software are failed attempts at coring, primarily from the business side.
The digital home is an example of coring in process for a potentially enormous but still
ill-defined platform market.
i.

Google in Internet Search

Google, founded in 1998, started off as a simple search engine company and went on
to establish its proprietary search technology as a foundation for navigating the Internet.
Let’s see whether Google satisfied the two conditions of platform potential: (1) performs
at least one essential function within the system, (2) easy to connect to or to build-upon,in part to allow different end-uses.
First, since the Internet quickly became an un-chartered universe of information,
Google brilliantly solved an essential technical problem – how to find anything in themaze of the Internet, with millions of web sites, documents, and other content online.
Google’s search function provided an essential function to use the Internet. Second,
Google distributed its technology to web site developers and users as an embedded
toolbar, making it easy to connect to and to develop upon. It also allowed different uses
(such as combining search with different kinds of information or graphics) due to theinherently versatile nature of Internet search.
But where Google really won the platform leadership battle for Internet search was on
the business side. Google solved a fundamental problem, which was that in the earlyyears there was a lot of confusion in the industry about just how to make money on theInternet. Google found a way to link focused advertising to user searches. Ads appear
only along with specific searches, so users should have some interest in the advertisers.
Google’s advertising fees also seem low or modest relative to their effectiveness andultimately are based on what the advertisers choose to pay. In effect, Google
revolutionized the advertising business by re-architecting the relationships between
advertisers and Internet users. Today, Google’s market value is $145 billion, eight times
that of the largest advertising agencies such as WPP. Of course, Google had competition.
In the mid-1990s, Digital Equipment created a powerful search engine tool for theInternet, AltaVista; several other firms created equally powerful search engines, such as
Inktomi and Yahoo!. But these and other competitors did not offer targeted ads or prices
based on bidding and effectiveness. We therefore contend that Google’s competitors
failed in the business aspect of market coring.
Google continues to extend and promote what has become the basic Internet usage
platform. In June 2007, Google held its first developers’ conference with 1000
programmers in attendance and another 5,000 at 10 other locations around the world. The
agenda included presentations on Google's Application Programming Interfaces (APIs) toenable developers to embed Google applications such as search, maps, calendars on
5websites, or to develop custom search engines. Google also presented APIs for the Web
2.0 social networking site YouTube, which it purchased in 2006. Google has increased
the amount of free online software it provides, ranging from e-mail to word processing,and is expanding its ambitions. Google’s goal today is to provide to millions of users
advertising-supported online software, moving from being a complementary platform to
Microsoft, to become a direct competitor. Google even has indicated that it will provide
free wireless internet access in some locations.
ii. Qualcomm with Wireless Technology
Qualcomm provides an example of coring that, in terms of profitability, has been
wildly successful in recent years. Founded in 1985, Qualcomm started out designingcommunications technology for satellites and military applications and went on toestablish its proprietary wireless communications technology as a platform for thecellular phone industry.3 However, the company also has been threatened by growing
opposition among powerful third parties within its ecosystem.
One major issue is that, unlike Google, Qualcomm may not have permitted its
partners and customers to make enough profit. But another issue is that wirelesstechnology is evolving relatively fast. In any market where there is a rapid pace oftechnological change, we think it is much more difficult to establish and maintain aposition of platform leadership because new competitors appear and customers can
switch with each new technology generation. At the same time, in rapidly evolving
markets, platform leader wannabes must make special efforts to create strong economic
incentives for their partners and customers to continue using and investing in thecommon technology and applications to help the platform evolve. But let’s see whether
Qualcomm satisfied our two pre-requisite conditions for platform leadership potential.
Then we shall return to how Qualcomm is faring on the business side of coring.
First, Qualcomm solved a basic technical problem of the late 1980s and early 1990sof incompatible and inefficient wireless cell phone technologies. This problem affected
negatively other industry players such as telecom operators and handset manufacturers.
Qualcomm invented the CDMA (Code Division Multiple Access) technology, which
breaks phone calls into small bits and then reassembles them much like the Internet doeswith data packets. Key industry players such as AT&T (later Lucent) and Motorola soon
considered CDMA as the most efficient technology for cell phones and licensed thetechnology. We conclude that Qualcomm met the first condition for platform potential.
Second, Qualcomm specifically invested in chipset designs embedding its technology
to facilitate third-parties’ adoption, and made CDMA widely available for licensing. The
chipsets were compact integrated circuits which had physical connectors that made iteasy to plug them inside cell phone handsets – and Qualcomm licensing of its intellectual
property made it easy for operators to use CDMA protocols. This strategy enabled dozens
of companies to include Qualcomm technology in most ―2G‖ (second-generation) andmany 3G cell phones as well as in hundreds of other wireless devices. Qualcomm
therefore passed the second pre-requisite condition for platform potential.

6On the business side, Qualcomm has a more checkered performance. In its businessmodel, an important source of revenue is from licensing its intellectual property.
Qualcomm therefore filed thousands of patents and challenged regularly and aggressively,in court, any potential violators. Third parties may not have appreciated this litigious
approach. But, since Qualcomm owned approximately 80 percent of the patents forCDMA and CDMA2000 technology, for many years, customers had little choice. Also,
Qualcomm lessened some of the conflicts with third parties in the late 1990s, such as byselling its cell phone handset business, which had competed with its own handset-makercustomers such as Nokia, Ericsson, and Motorola.
In fiscal 2006, Qualcomm reported an astounding net income of $2.5 billion on salesof $7.5 billion, selling both chipsets as well as licensing its patents. However, as thetechnology and market continues to evolve, we can see Qualcomm’s position weakening.
European companies led by Nokia as well as companies sponsored by the Chinese
government have been developing or exploring alternatives to Qualcomm patents toavoid paying high license fees. In 2007, Qualcomm only owned 20 percent of the patents
for the newer WCDMA standard, popular in Europe. Nokia also has gone to court tochallenge Qualcomm’s high licensing fees. Qualcomm might have avoided this situationin the cell phone market by investing more of its profits in R&D for the next-generation
technology as well as making more aggressive efforts to work with, not against,
customers such as Nokia. Qualcomm is also trying to diversify. It is attempting the samecoring strategy for mobile broadband connectivity on laptops, with 70 models embedding
Qualcomm chipsets as of May 2007.4
We think that the fast pace of technological evolution in the cell phone industry anddegree of opposition within the ecosystem will make it difficult for Qualcomm tomaintain its position and profit margins. Still, it may well be able to establish a strong
business in wireless technology for other mobile devices. But Qualcomm probably needs
to change its philosophy and pay much more attention to the business side of coring. It
could make its technology cheaper to license. It could also work more cooperatively withpartners and customers to prepare better for generation changes in the technology and toencourage the development of complementary innovations.
b. Examples of Failed Coringi. GM OnStar in Automotive Telematics
In 1995, General Motors started an effort towards launching a new industry platform,
OnStar, with the goal to give wireless capabilities to the automobile for navigation
systems, directions, notification of accidents, remote diagnostics, maintenance reminders,internet connectivity, remote opening of locked vehicles, and other services. GM
established OnStar as a wholly owned subsidiary in collaboration with its EDS andHughes Electronics divisions. The technology platform consists of hardware, software,and service agreements with a wireless provider.
Initially, GM managed to get various automakers (Toyota/Lexus, Honda,
Audi/Volkswagen, and Subaru) to adopt the OnStar platform. Gradually, however, otherautomakers concluded that these capabilities and, in particular, the information on the7customer that OnStar generated about driving habits, was too valuable to let a competingcompany control. Consequently, these firms decided to build or buy competing systems
and stopped licensing OnStar.
In our analysis, GM had not found a way to position its new technology as an
essential part of a neutral industry platform. It might have spun off OnStar as anindependent company. Or GM might have done what Intel is famous for: creating theequivalent of a ―Chinese wall‖ around its architecture labs, the core microprocessor
business, and various chipset businesses that compete with Intel customers. We think GM
failed at the business aspect of coring, though OnStar remains an attractive service
platform for GM customers and, with internal transfer payments, generates a profit for
the automaker.5
ii. EMC in data storage
EMC, a market leader in data storage technology founded in 1979, launched astrategy in the early 2000s that aimed to establish its hardware and software technology,
known as Wide Sky, as a new industry-wide platform. Wide Sky was a middleware
software layer that made it possible to integrate and manage third-party hardware. By
doing so, it solved an important technical industry problem that affected all IT customers:
the efficient management of a growing assortment of heterogeneous information systems,
which store more and more mission-critical data. Like GM, we can say that EMC
succeeded in the technological aspect of coring, but failed at the business side.
EMC was unable to convince its competitors – principally IBM, Hewlett-Packard,
Hitachi, and Sun Microsystems – to adopt Wide Sky. Non-EMC customers were also
reluctant to adopt a proprietary standard. Perhaps EMC should simply have given away
its technology for free or spun it off into an independent, neutral entity, making every
effort possible to get the input and cooperation of key industry players. If a common
platform for data storage benefited the storage market, EMC could have benefited morethan competitors because it had the largest market share. In any case, EMC’s competitors
decided to establish their own open-standards platform controlled by a newly formed
organization, the SNIA (Storage Networking Industry Association). The number of firms
and users supporting this open technology eventually forced EMC to abandon its
platform-leadership effort and adopt the SNIA standards.6
Adoption of the consortium’s SMI (Storage Management Initiative) specification(SMI-S) is on the rise since it has received the formal backing of most of the storage
industry firms. However, this standard has not yet fulfilled the promise of enabling
centralized management of heterogeneous systems. This coalition of firms has therefore
succeeded at the business aspect of coring, but failed at reaching a technical solution that
effectively solves the industry’s main technological problem. The functionality provided
by this industry coalition still lags the functionality that EMC could have provided. Thissituation still leaves the possibility for EMC to reassert itself as a potential platform
leader, but it would probably have to work through the consortium and make more of its
technology open and perhaps even free or nearly free.
c. An Example of Coring in Process8

i. The Digital Home (Intel, Microsoft, and others)
The digital home represents a market where many technology vendors are ready toproceed but there are few customers and related technology and business sides have notyet come together to define a coherent platform and ecosystem. The goal since the mid1990s for the digital home has been to connect entertainment devices (e.g., television,
stereos and music players) and appliances (e.g. heating or air conditioning systems,
refrigerators) with a home computer network. To further this vision, several companies in1999 formed a group called the Internet Home Alliance, bringing together Sears,
Panasonic (Matsushita), General Motors, Intel, and Cisco to deal with the various
challenges, such as wiring homes with high-bandwidth Internet service or making
wireless functionality available.7
While at least some consumers should want their digital systems to communicate witheach other and with a PC, demand for such a platform has progressed extremely slowly.
We think this is a coring problem because no company has managed to insert thenecessary technologies into all the relevant products or to create the business incentives
to motivate industry players to converge on a common technology. The two firms that
ultimately took control of the PC platform are once more vying for platform leadership inthe digital home market, though it is not clear that either will succeed without lots of help.
On the software side, Microsoft, in 2002, launched its Windows Media Center
software, which enables Windows to perform some of the necessary digital homefunctions. Microsoft continues to evolve the Windows software, though usage of theMedia Center software is minuscule. Slow adoption on the Windows side has allowed
Apple, Hewlett Packard, Sony, and other firms to enter this market segment with theirown software and hardware combinations. On the hardware side, Intel, in 2003, launched
a new digital home business division and began marketing a bundle of microprocessors
intended to be the core chips in new home PCs and perhaps other devices. As it did withthe personal computer, Intel put in place a series of initiatives to encourage the adoptionof its microprocessors and networking standards among customers, partners, and softwaredevelopers interested in home applications. Also in 2003, Intel co-founded the Digital
Living Network Alliance to promote interoperable common standards for audio andvideo within a home network. This group, whose board of directors now consists ofrepresentatives from Intel as well as Microsoft, Sony, Phillips, Hewlett Packard,
Matsushita-Panasonic, and Nokia, has grown to over 130 members.
Our assessment is that this market will require many years for a platform and a leader
to emerge. On the technology side, there are too many diverse products involved, andconnectivity adds cost. Moreover, the communications protocols and wirelesstechnologies keep evolving and there is no common standard followed by applianceproducers around the world. Business-wise, the major challenges include how to justify
the additional cost of adding technology and features that few users demand. There arealso issues such as digital rights management for audio and video content. Anotherchallenge is the different product replacement cycles: Customers buy new computer
hardware and software or multimedia content much more frequently than they replace9their heating and air conditioning systems or buy new durable goods like refrigeratorsand television sets, which can last a couple of decades.
So, although Microsoft, Intel, Apple, Sony, and many other firms already produce thekey components necessary to create a digital home platform, the business drivers are notthere and the digital home remains more an idea than a market. This diverse market may
require a different type of platform leader and a different approach to coring. For
example, the digital home might require coordination through a governmental or industry
organization that can identify the relevant technical standards and technologies,
encourage the development of interoperable as well as complementary products andservices, and use this consensus to promote both the technology and the business sides ofthe platform. In fact, we can already see signs of this happening. A large non-profit
industry coalition for home builders, the Continental Automated Buildings Association,
has taken over the Internet Home Alliance and continues working on the long-term
platform goals. Key directors of this organization include executives not only frombuilders such as Tridel and Leviton but also from technology companies such as Bell
Canada, Honeywell, Hewlett Packard, Microsoft, AT&T, Invensys, Cisco, Siemens,
Panasonic, Whirlpool, and Trane.8

4. Tipping: How to Win Platform Battles by Building Market Momentum
We call ―tipping‖ the set of activities or strategic moves that wannabes can use toshape platform market dynamics and win a platform war when at least two platformcandidates compete. These moves cover sales, marketing, product development, andcoalition building. As with coring, successful tipping requires actions taken from both thetechnology and the business sides of the platform. First, though, we need to show how
some key ideas discussed by other authors in another context can apply to tipping. We
also have two specific suggestions for successful strategies, namely tipping acrossmarkets and building coalitions, as well as comments on some potential mistakes
managers can make.
First, we need to recognize that many platform battles involve competition among
technical standards and incompatible technologies (e.g. VHS vs. Beta, Windows vs.
Macintosh, CDMA vs. GSM, or Toshiba’s HD-DVD vs. Sony’s Blu-ray standard forhigh-definition media storage). In these cases, as other authors have discussed, companies
should try to gain control over an installed base, broadly license their intellectual property,
and do other things to facilitate partner investments in complementary innovation.9 They
should also invest in building brand equity as well as manufacturing, distribution, orservice capabilities to signal support of the platform. For example, Matsushita publicized
its large investment in mass production facilities as an argument to convince developersof videotapes to adopt the VHS standard, which had been developed at its much smaller
Japan Victor (JVC) subsidiary. Intel, when trying to convince motherboard makers to
adopt their new interface for connecting peripheral devices (PCI), committed to develop
it themselves in large numbers. All these approaches are helpful to master the businessside of tipping.

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Second, we need to recognize that pricing is another useful strategic weapon in
platform battles, but it is more complex to use than in simpler product markets. We do
find helpful the idea that platforms can be understood as ―double-sided‖ markets, and thatit may be necessary for platform leaders and wannabes to subsidize one side of themarket (for example, software application developers) in order to bring on the other,paying, side (for example, software end users).10 But we do not see any clear frameworks
that tell mangers how much to subsidize one side of the market over the other. Moreover,the price that maximizes profits for a standalone ―hit‖ product may not encourage a
global ecosystem of complementors or make much difference if new and better platformgenerations appear. For example, Qualcomm clearly emerged as the leader in 2G wirelesstechnology, but its high royalty and licensing fees have encouraged powerful non-U.S.
complementors (like Nokia) and governments (like China) to seek alternatives.
At the opposite extreme, trying to stimulate demand through low or zero pricing for
all or part of a platform system can destroy the business model for complementors. As wewrote in Platform Leadership, Intel made this mistake when it tried to enter the PC videoconferencing market with a line of products that competed with higher end systems madeby PictureTel and other companies. Customers suddenly stopped paying for expensive
video conference equipment and services, forcing these companies out of existence andprobably delaying the adoption of the PC as a device for video communications. Software
product companies that have to compete with free open source products of comparable
functionality have faced a similar problem: Low- or zero-priced products can destroy the
incentives to innovate for companies in those markets, although, in software, some firms
have survived by selling services and advertising.
But there is another way to do tipping that we found quite powerful: we call thistipping across markets. This is when wannabes cross over the boundary of their existing
market to absorb technical features from an adjacent market and bundle them to extend
their platform. Such bundling across markets involves both technology (as it changes thedesign of a product) and business (as it involved pricing of the combined product).
Tipping across markets seems particularly important in the context of technologicalconvergence, which is pervasive among computers, telecommunications equipment, anddigital appliances. Firms who tip across markets by bundling new features can leverage
existing market power, technology, or reputations to help them move into adjacentmarkets.
Another novel tipping behavior we have observed is when competitors or users band
together in a coalition, as a defense mechanism, to fight entry by a platform leader
wannabe. This can be seen not only in the EMC storage example but also in cellular
telephony with Nokia ganging up with competitors to back up the Symbian operating
system to build a viable alternative to Microsoft’s mobile operating system. Japanese,
European, and Chinese telecommunications equipment producers and service providers
have also worked together to oppose Qualcomm’s monopoly in CDMA technology. As
we later discuss, Linux users and service providers have worked together to limit thepositions of Unix as well as Windows in the server operating system market.
Our research also suggests that companies can encounter specific obstacles and makecommon mistakes when attempting to help a market tip. Of course, established platform
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leaders with monopoly power in one market, such as Microsoft, Intel, Cisco, andQualcomm, must take care not to violate anti-trust laws. In addition, however, problems
sometimes occur because tipping strategies dependent on narrow technical standards are
effective only as long as platform boundaries remain relatively fixed and predictable.
This is because companies that dominate in one market may fail to maintain theirpositions when converging technologies create opportunities to extend other platforms.
For example, Palm once dominated the hand-held computer market with its PDA productbut this is now giving way to smart phones. Another problem can occur when opening aplatform’s inner workings too much to encourage the supply of complementary
innovations. Too much openness can expose the firm to imitation. IBM made thismistake when it asked Microsoft and Intel to provide key components of its PC platformand did not contractually retain rights to the operating system or the microprocessor
design.
We think that Linux (for web server operating systems but not for the desktop) andInternet Explorer (for web browsers) are particularly good examples of different but
successful tipping strategies. Netscape (with its browser) and Palm (with its PDA) are
well-known cases of failure. There are several emerging markets where tipping has yet tooccur, though video game consoles is useful to demonstrate the variety possible in tipping
strategies and the difficulty of declaring a winner in large markets that can sustain
differentiated or niche products.
a. Examples of Successful Market Tippingi. Web operating systems (Linux vs. Unix and Windows)
Linux provides an excellent example of tipping through the power of a large, and still
growing, coalition of service provider firms as well as users. This operating system wasintroduced first in 1991 by the Finnish graduate student Linux Torvalds, based largely on
the Unix design, and evolved through a formal and informal community of open source
programmers and users around the world. The interface and installation requirements
continue to limit its popularity among average consumers, resulting in an ongoingshortage of everyday desktop applications, compared to Microsoft Windows, thedominant software platform for the PC. Nonetheless, Linux has managed to become thefastest growing operating system used in the back-office, particularly for web servers.
From about 20 percent of the installed base for server software in 2005, Linux grew
to about 50 percent of the market by 2006 (compared to only about 3 percent of thedesktop operating system market).11 In contrast, Unix (whose main distributor is Sun
Microsystems) remains expensive and requires more costly proprietary hardware.
Windows server from Microsoft is still cheaper than Unix but is more expensive than anominally free product. Intel also adapted its microprocessors to run Linux and thisreduced hardware costs. Even Microsoft in 2007 signed an agreement with Novell tomake sure that Windows interoperates with Linux in the future.
Several factors contributed to the success of Linux for back-office applications –suggesting that price alone does guarantee a market will tip.12 Linux offered not only aseemingly low cost of ownership (the price is nominally zero, though service and training
12

can be expensive) but also very high quality at least for skilled IT professionals. By itself,
an operating system is of very limited utility. But the open source community made surethat Linux worked exceptionally well with what we can consider the ―killer‖ application
for web masters -- the free and open source Apache web server. Still, we believe that
Linux would not have become widely accepted as an enterprise software platform
without the decision of numerous powerful companies, led by IBM and Hewlett Packard,
to provide support services for Linux as well as to bundle it with their popular hardware
servers and other software products. The legitimacy that IBM in particular gave to Linuxhelped startups such as Red Hat survive as service providers for Linux users, and made it
more comfortable for major enterprise application vendors such as SAP and Oracle to
make their products work with Linux.
ii. Internet Browsers (Internet Explorer vs. Netscape Navigator)
We have already mentioned the case of Internet browsers but here we would like tohighlight Microsoft’s tipping strategy. As discussed elsewhere,13 Netscape introduced thefirst mass-market browser in 1994 and dominated the market for several years. Microsoft
designed its own browser, Internet Explorer, and bundled this ―for free‖ with Windows
from 1995. As hundreds of millions of new PCs shipped with Internet Explorer over the
next several years, and as Microsoft steadily improved its browser technology,
Netscape’s browser dropped from around an 80 percent market share to a negligible
presence. In this case, we also have the problem of whether the browser is a separate
product from the operating system and how a company with a monopoly in one market
has to treat the second product. By bundling a product for free that competitors offered
for sale (and sometimes for free as well), Microsoft violated antitrust law because it hadsuch a dominant share in operating systems. What is worse is that Microsoft pressured
PC manufacturers and service providers not to bundle Navigator.
Apart from the antitrust story, however, we can still learn from Microsoft’s strategy.
One dominant platform can be a powerful distribution mechanism for a company thatwants to enter other platform markets — if there are ways to bundle the technologies or
do other things, such as use the same distribution channels or create uniquecomplementarities across the different products. Windows would have served thesefunctions for Internet Explorer even if Microsoft had avoided antitrust problems such as
by offering Windows with and without the browser at different prices and not pressured
PC manufacturers to avoid the competing product. We are especially confident in thisjudgment because Microsoft had much greater resources to continue investing in browser
R&D and Netscape management made a series of strategic and technical errors, as we
discuss next.
b. Examples of Failed Market Tippingi.

Netscape

How might Netscape have maintained its early lead and prevented the market fromtipping toward Microsoft? For one thing, Netscape managers misunderstood how to keepa market from tipping in a different direction. Once a comparable product is free,competitors have little choice but to reduce their prices to a similar level and find other13

ways to make money, such as through services or advertising. Netscape made the mistakeof continuing to charge customers such as Dell and AOL as well as corporate users for
the Navigator browser even after Microsoft began bundling a competitive browser for
free. Netscape was also late to see that it could generate enormous advertising revenues
from its highly popular website.
But perhaps Netscape’s greatest mistake was to challenge Microsoft too directly andpresent the browser as an alternative computing platform before it had enough of a userbase and ecosystem of complementors (web site designers, web application developers,
and Internet service providers as well as PC assemblers who were licensing Navigator) tosustain its position.14 Navigator initially was a wonderful complementary application toWindows and might have remained so, at least for several more years. Netscape had
million users by 1995-1996, but there were hundreds of millions of PC users out there
who had yet to move to the Internet. We do not think it unreasonable that Netscapemanagers should have thought more carefully about the potential size of the market andhow their early lead could quickly erode with a competitor such as Microsoft, whichshipped hundreds of millions of copies of Windows each year.
ii.

Palm with Handheld Computers

Palm involves a case of failure due to its strategic ambiguity – whether to be a
product company or a platform company. After a resounding success in 1996-1999 as thepioneer of personal digital assistants (PDAs) with the Palm Pilot, Palm tried to do twothings at once: establish its Palm device as the preeminent PDA product while promoting
the Palm OS as an industry platform that it could license to PDA competitors. Platform
leaders generally have difficulty encouraging complementors if they do not establish aposition of neutrality.
Palm also has suffered from convergence – the PDA market is quickly being
absorbed by the ―smart phone‖ market. Palm did end up splitting its operations into two
companies in 2003, creating palmOne for the PDA devices and PalmSource for the OS,
but this was too late for the market. PalmSource became increasingly dependent on
palmOne as its main customer. In 2005 it was sold to a Japanese-based software company,
Access, and gave up the Palm name. Today there is less confusion between Palm as
product and Palm as platform, but other platform technologies have much more market
share in this space. Access continues to market the Palm OS with limited success.
c. An Example of Tipping in Progress
i. Videogames (Sony, Nintendo, Microsoft )The videogame console market reflects the different kinds of tipping strategies
possible for platform leader wannabes and the difficulty of choosing a winner where suchdegrees of differentiation in strategies and products is possible. The ecosystem generated$12.5 billion in sales in 2006, including games and consoles. 15 We have intensecompetition among three platforms. Every five or six years, new generations of consoles
appear with different features or qualities, triggering a new series of investments andcompetition. Although some games run on all the different consoles as well as personal
14

computers, the game consoles represent very distinct platforms and different platform
strategies.
Microsoft, the newest player in consoles, has approached games much as it has thePC market. It has tried to rally the largest possible number of developers. It hasdeveloped a highly modular software architecture based on Windows and has eagerly
disseminated Windows-like programming tools to facilitate game development. 16
Microsoft is also strong in online gaming and has designed its X-box console to work
seamlessly with PCs. So far, however, Microsoft loses money on each console and hopes
eventually to make a profit on software.
Nintendo, the loser in the last round of console wars, is selling the cheapest productwhile developing in-house or through a tightly controlled network of developers a smaller
number of games but potentially bigger hits. Its consoles share a lot of technology withprevious generations, making new games cheaper to develop. In this last round, Nintendo
also surprised the industry with a clever innovation combining hardware and softwarethat changes the player’s experience: a wireless remote control for its new Wii console.
This new technology allows for a more intuitive gaming and has attracted new users
interested in exercising and sports such as golf and boxing. As of mid-2007, the Wii wasoutselling competitors by a large margin.17 This suggests that this is not an easy platform
market to dominate. The loser in one round can win the next with the right features andcomplementary innovations.
Sony, which won the last round with a 70% market share for PlayStation 2, has
focused on the high end and ―hard core‖ players. Its latest console, PlayStation 3 (PS3), is
the most expensive. One problem, though, is that Sony seems tied to its historical roots asa great product company with little understanding of how to turn products into industry
platforms (we have in mind Sony products such as the Betamx VCR, the Walkman, and,more recently, its Blu-ray DVD players). Not surprisingly, Sony has been slow to market
with its latest console (because it adopts so many state-of-the-art technologies) and slow
to help game developers (though it has tried to change recently).18
Some platform markets are sufficiently competitive while also having enough roomfor differentiation and niche strategies that a winner may never emerge. Videogame
consoles may fit this case. None of the competitors seems vastly superior and each has
strengths. However, if PC manufacturers add more specialized capabilities for gaming,then we expect Microsoft to have an advantage. It may be able to tip across platforms by
modifying Windows, appealing to the enormous network of Windows programmers, andusing its software tools expertise to encourage more game developers to support
Windows and X-box.
5. Final Thoughts
One issue that has surfaced in our discussions with managers is whether small or
medium-sized firms can truly become platform leaders, or do you have to be a large firm
like Microsoft or Cisco? We believe that coring is an option possible for small and large
firms alike because technology and architectural leadership do not directly depend on thesize of the firm. Qualcomm, for example, was little more than a startup company when it
15

introduced its technology for wireless devices. Japan Victor and even Microsoft and Intel
were small firms when they first became platform leaders. And Linux was the product, atleast initially, of a lone graduate student working in a remote corner of Europe. At thesame time, though, smaller firms are likely to have a harder time tipping markets on theirown and generally will need to establish ecosystem partnerships or coalitions of providers
and users – as JVC, Microsoft, Intel, and Linux have done.
In general, success as a platform leader wannabe requires a compelling vision of the
future as well as the ability to create a vibrant ecosystem by evangelizing a businessmodel that works for the leader and potential partners. It can sometimes be hard toconvince others to follow a particular vision of the future, for example, when an industry
is undergoing transition and its contours are ill-defined, or when technology is evolving
too rapidly. But these are the very conditions when platform leaders can stand out –precisely because they are so badly needed.

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About the ResearchOver the past decade, we have investigated dozens of companies that have attempted to formulate
and implement platform strategies. These firms operated in a variety of industries, including
computing, telecommunications, electronic appliances, semiconductors, enterprise software, data
storage, automobiles, web portals, and electronic payment systems. The major firms we havestudied include Intel, Microsoft, Cisco, Palm, NTT DoCoMo and NTT Data. We have also
worked closely or exchanged ideas with firms such ranging from SAP and Nokia to eBay,
Boeing, and Siemens Automation. In our research, we have interviewed hundreds of managers
and engineers, and complemented the interviews with analysis of firms’ archival records andcompany and industry data. The first stage of our study aimed at uncovering the drivers ofsuccess at established platform leaders. The results of that work were published in SMR (2002) aswell as in our book Platform Leadership (HBS Press, 2002).
The focus of our previous work was on how Intel, Microsoft, Cisco and other firms had beenable to drive industry innovation and sustain positions of platform leadership. We identified four
―levers‖ or mechanisms through which successful platform leaders were able to ―architect‖ or
influence external innovation. The first lever was firm scope: the choice of what activities toperform in-house vs. what to leave to other firms. This decision is about whether the platform
leader should make at least some of its own complements in-house. The second lever wastechnology design and intellectual property: what functionality or features to include in theplatform, whether the platform should be modular, and to what degree the platform interfaces
should be open to outside complementors and at what price. The third lever covered external
relationships with complementors: the process by which the platform leader manages
complementors and encourages them to contribute to a vibrant ecosystem. The fourth lever wasinternal organization: how and to what extent platform leaders should use their organizational
structure and internal processes to give assurances to external complementors that they are
genuinely working for the overall good of the ecosystem. This last lever often requires theplatform leader to create a neutral group inside the company, with no direct profit-and-loss
responsibility, as well as a Chinese Wall between the platform developers and other groups thatare potentially competing with their own complementary products or services. Taken together, theFour Levers offer a template for sustaining a position of platform leadership.
This article presents findings from the second stage of our research. We are now focusing on
drivers of success at firms that wish to become platform leaders in new or established markets.

17Endnotes

1

Since we published our work on platform leadership in 2002, a number of students at MIT and elsewhere
have inspired us to continue this research and, in particular, to go beyond the 4 levers and investigate
market or business factors that help platform-leader wannabes succeed. In particular, we would like tothank Ray Fung for his 2006 master’s thesis, ―Networking Vendor Strategy and Competition and Their
Impact on Enterprise Network Design and Implementation‖ (MIT System Design and Management
Program) and Makoto Ishii for his 2006 master’s thesis, ―A Strategic Method to Establish Sustainable
Platform Businesses for Next-Generation Home-Network Environments‖ (MIT Sloan Fellows Program).
2
We thus disagree with J. Sviokla, and A. Paoni, “Every Product’s a Platform,” Harvard Business Review,
October 2005.
3
This discussion of Qualcomm is based primarily on D. Yoffie, P. Yin, and L.Kind, “Qualcomm, Inc.
2004,” Harvard Business School Case #N1-705-401 (January 25, 2005). See also “Qualcomm Business
Model: A Formula for Innovation and Choice”,
http://www.qualcomm.com/about/pdf/QCOM_Business_Model_0307.pdf
4Source: Qualcomm Annual Report 2006
5
This description of OnStar benefited from public information as well as an informal discussion with thepresident of OnStar, Chet Huber, at the MIT Sloan School on April 4, 2007.
6
See J. Saghbini, “Standards in the Data Storage Industry: Emergence, Sustainability, and the Battle for
Platform Leadership,” MIT System Design and Management Master’s Thesis, June 2005.
7
See http://www.caba.org/iha/iha-list.html and P.Thurrott, ―Internet Home Alliance Integrates Its Way into
US Homes,‖ Connected Home Magazine, November 7, 2001,
http://www.connectedhomemag.com/Articles/Print.cfm?ArticleID=23133&Path=Networking
8
See http://www.caba.org/aboutus/index.html
9
See C. Shapiro and H. Varian, “Information Rules” (Boston: Harvard Business School Press, 1998).
10
A good summary of this research can be found in T. Eisenmann, G. Parker, and M. Van Alstyne,―Strategies for Two-Sided Markets‖, Harvard Business Review, October 2006.
11
DM Review, “Industry Research: Linux vs. Windows – Is the Gap Narrowing?”
http://www.dmreview.com/article_sub.cfm?articleId=1030321 May 24, 2005; and Wikipedia, “Comparisonof Windows and Linux” www.wikipedia.com (accessed May 29, 2007).
12
See, for example, G. Moody, ―Rebel Code: Inside Linux and the Open Source Revolution‖ (Perseus,2001) as well as our treatment of Linux in A. Gawer and M. Cusumano, ―Platform Leadership: How Intel,
Microsoft, and Cisco Drive Industry Innovation‖ (Boston: Harvard Business School Press, 2002).
13
M. Cusumano and D. Yoffie, “Competing on Internet Time: Lessons from Netscape and Its Battle with
Microsoft” (New York: Free Press, 1998).
14
Cusumano and Yoffie.
15“Console Wars – Video Games,” The Economist, 24 March 2007.
16
M. Adkisson, V. Costan, Y. Khan, D. Kim, and L. Popov, “The 7th Console War”, MIT Sloan School,
Software Business Class (15.358) Group Project, December 2006.
17“Wii Fans Give Nintendo a Boost,” Boston Globe, May 29, 2007, p. C4.
18“Console Wars – Video Games,” The Economist, op. cit.

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