Why Innovation Platforms Threaten Your Company — and You

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June 21, 2017
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The IT industry has talked about “platforms” for a long time. Today, there is a rise of a new twist on this concept, which I refer to as “innovation platforms.”

An example of an innovation platform is cloud computing. The cloud took a clunky, expensive, lengthy process and collapsed it into a streamlined, cheap, and quick service; by so doing, cloud computing unleashed a storm of innovation and fostered companies like Netflix, Snapchat, Pinterest, and Dropbox.

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In a sense, innovation platforms represent the latest evolution of what Joseph Schumpeter called “creative destruction.” Innovation platforms enable tremendous creativity for those who leverage the platform, but lay waste to incumbents tied to the legacy mode of operation.

Joseph Schumpeter: The Prophet of Creative Destruction

Why are innovation platforms important? Because they are accelerating the transformation taking place in every industry due to the digital shift from atoms to bits.  

This transformation will be every bit as wrenching a disruption as that caused by the industrial revolution — but it will occur much more quickly, which will make the human cost even greater.

The obvious question is, what makes an innovation platform … innovative?

Here are the characteristics of an innovation platform and why they are so important.

They replace analog processes with an API

Today’s industry incumbents have prospered by mastering analog processes. They succeed by acting as a central coordinator of challenging processes that require expertise. They then leverage that position of coordinator to become a gatekeeper — an entity that extracts rents due to a privileged position.  

Take, for example, the publishing industry — one with which I am very familiar.

Publishers employ a whole range of personnel — acquisition editors, manuscript editors, rights managers, shipping specialists, sales reps, and so on. They also have relationships with a publishing ecosystem — agents, printers, shippers, distributors, and reviewers. When the only alternative to an established publisher was to print one’s own book, attempting to recreate these resources were financially ruinous. So most authors relied on a publisher to do the heavy lifting and in turn received 10% of a book’s revenue.  

Traditional publisher vs. Kindle

The Kindle changes all that. Today, most of the services needed to bring a book to completion are available from individual entrepreneurs located on sites like Fiverr, at much lower costs than the traditional publishing version of those services. And, by the way, Kindle authors receive 70% of their book’s revenues.

Distribution is trivial — upload the file to Amazon and it’s available in the Kindle store almost immediately.

This decomposition of the publishing bundle means that most of the value publishers formerly provided are obsolete in a Kindle world.

This substitution is taking place across a range of industries. Innovation platforms are everywhere. Cloud computing is one example. So too is YouTube. And Facebook. And Spotify. All of them provide hands-off ways for people to self-service and reach a market, rather than forcing everyone to go through a gatekeeper focused on optimizing a time-consuming manual process — and on extracting most of the value of the offering.

They are highly scalable

In the old analog world, doubling output required, if not a doubling of staff and capital, a very large increase.

In the innovation platform world, increasing output is much more scalable. The software that handles X output can easily handle 2X output with a server upgrade. Obviously, it’s not that simple, but scale is achievable much more easily than previously possible.

Innovation Platforms Enable Scalability

There’s another sense that they are highly scalable. Because they don’t require additional people to increase throughput, they can grow much more quickly than analog-based alternatives.

As innovation platforms experience increased use, it is possible for them to scale quickly and easily, which means they can enter a market and grow it incredibly quickly.

What this means for you, if you work at a gatekeeper company — even one that is currently successful — is that an innovation platform can enter your market and become a major presence in the blink of an eye.

They democratize access

Turning back to publishing, in the old way of doing things, you needed an in to get published. Either you had to wheedle your way into getting an agent to represent you or you had to hope you could make a personal connection to someone at a publisher. That’s why the stories of people pressing their manuscripts into editor’s hands at cocktail parties are such a cliche — because they’re true.

And getting noticed wasn’t the end of the process. Then you had to sell them on publishing your book. I referred a friend to Dummies Press, and even with a warm introduction, it still took him 18 months to get a contract. Dummies kept asking for more information, transferred responsibility for the topic to another editor who wanted to start over, and finally asked him to explain a lot of stuff that was in the proposal.

Kindle changes all that. Nobody stands between the writer and a decision to publish.

And innovation platforms democratize buyer access, too. Kindle books are available immediately upon purchase, so readers can buy a book and start reading immediately. There are readers who go through two or three romance novels a day. They love the Kindle, because they can get as many as they want, whenever they want, without having to go out to buy them or wait for a delivery.

And, by the way — that “ebooks have topped out in adoption, and everyone else is sticking with paper”? That’s nonsense. Genre books are perfect examples of Christensen’s theory of disruption — the price-conscious, overserved consumer is the beachhead buyer with the entire market ultimately shifting to the new offering.

A future Booker Prize winner is already self-publishing on Kindle. And people are already reading him or her.

They change industry economics

Because innovation platforms operate so much more efficiently, they typically charge less. So, for example, e-book prices tend to be lower, although for books published by commercial publishers this is less clear, as they’ve made valiant attempts to keep e-book prices as high as their paper counterparts. For self-published books, it’s quite clear: e-book prices are lower. Lee Child’s Jack Reacher books run $9.99, while Mark Dawson’s very similar John Milton books run $4.99. Lest you dismiss Dawson as a hack who can’t charge any more, he earns seven figures with his books.

$9.99 vs. $4.99

The same phenomenon can be observed with cloud computing. Running an application in the cloud is cheaper than running it yourself, the bleating of “on-premises is cheaper” acolytes notwithstanding.

Just as important, they make the economics more transparent. AWS (and Azure and Google, or AAG as I refer to the trio) post their prices and charge you for what you use. Buying kit from the legacy players is like buying a new car, complete with mysterious charges, complicated pricing schedules, and tortuous negotiations.

They leverage network effects to build rich ecosystems stat

I already mentioned the service providers available for authors self-publishing via the Kindle. This illustrates a truth: no innovation platform, no matter how rich its functionality, provides everything its users need.

This gives rise to an ecosystem of complementary products and services that extend innovation platforms.

The key difference for innovation platforms is how quickly the ecosystem builds.

For example, AWS offers its marketplace, where users can easily access software offerings that are pre-integrated with its service, use the same billing arrangement, and can be selected with the click of a mouse. At a recent AWS Summit I attended, Andy Jassy let drop that each month AWS marketplace offerings execute 300 million hours of processing time.

Rich ecosystem, stat. From 2015, BTW.

Every innovation platform has this kind of thing going on. YouTube attracts video services that sell intro/outro clips, automated services to help with search ranking, and so on.

Because access to the platform is typically through an API, it’s easy for providers to make complementary services available. This is quite a contrast to the traditional ecosystem partnership arrangement, which required dealing with a business development group that wanted to focus on only a few partnerships that it viewed as promising.

The rapid ecosystem buildout reflects the strong network effects of innovation platforms. AWS has benefitted from this — its early adoption by users led complementary services to target it, which in turn made it more attractive to users … and so on. This has made the job of the other AMG (Microsoft and Google) providers much more difficult, so they’ve had to turn to financial incentives to attract both users and ecosystem partners.

They replace oligopolies with monopolies

Most industries have experienced consolidation over the last fifteen years, enabled by the low cost of borrowing and a benign Justice Department. The consolidation in the gatekeeper industries has been particularly strong, as the high margins associated with these industries encourage buying similar companies and leveraging cost savings.

For example, the big six publishers became the big five when Penguin (itself a consolidated subsidiary of Pearson) bought Random House. Two thirds of the music industry’s total revenues flow to just three companies. One could look at any number of other gatekeeper industries and see the same phenomenon.

YouTube: The video monopoly

Because of the very strong network effects of innovation platforms, they tend toward even more centralization than oligopolistic markets. Absent the deep pockets of Microsoft and Google (and potentially Alibaba), it’s likely that AWS would have ended up the sole provider of cloud computing services.

One can look at a range of markets and see the same results. In video hosting, YouTube is massively larger than any other provider. In e-book platforms Kindle is dominant.

Don’t cry any tears for those displaced by this shift. The oligopoly players often behaved execrably. I linked to the publishing industry e-book antitrust settlement earlier in this piece. CBS directed Cnet to pull its review of the Dish Hopper because it allowed users to skip past commercials.

Oligopolies invariably abuse their market position through high prices and poor service. So don’t get suckered into feeling sorry for those hurt by the rise of the innovation platforms. It’s their own fault, and they deserve their fate.

It cannot be denied, though, that the technology and economics of innovation platforms foster winner-take-all marketplaces.

Don’t overlook the other side of the argument.

It’s easy to view the innovation platforms with dystopian eyes.

Look at all the disruption! Look at the layoffs in the gatekeeper industries! Worry that network effects will lead to market misbehavior!

It’s easy to see the problems with innovation platforms. Humans fixate on losses. But innovation platforms enable tremendous, well … innovation.

While AWS has put HPE, IBM, Dell, and others into the emergency ward, it has fostered incredible innovation by other companies. These companies take the characteristics I’ve outlined and use them to develop new offerings.

Netflix is an example. It adopted AWS and shifted its business from shipping physical DVDs to transferring video across the internet.

This not only enabled it to distribute video more conveniently to its customers (no more impatient waiting by the letter box!), it allowed Netflix to begin creating video content that would never have been produced by the existing market (see the “Innovating to Stay On Top” section of this article).

Pinterest could only exist on AWS. Its vast user base, the rich picture content those users shared, the wildly erratic traffic based on time of day or what celebrity tweets out her pins — none of this could have been economically delivered under the old way of doing things.

Pinterest would have had to buy massive amount of equipment. It would have been forced to begin charging users early in its life, before the network effects of the service kicked in. It couldn’t have existed under the old regime, but it prospers in today’s environment, underpinned by AWS.

Every innovation platform boasts similar stories. The Kindle e-book market has fostered writer creativity — so readers can now access dinosaur porn or vampire science fiction.

Which side of the divide are you on?

Innovation platforms provide entrepreneurial opportunities unthinkable 20 years ago. They enable individuals and small organizations to compete with large gatekeeper companies. And they let this happen from anywhere in the world.

The ongoing shift to a digital economy means the role and importance of innovation platforms will only grow. Each will foster incredible innovation as entrepreneurs assess their features and explore the opportunities they afford.

The critical question for you is which side of the divide are you on? Are you aligned with legacy gatekeeper companies, or have you thrown in your lot with one or more innovation platforms.

Make no mistake, being tied to a gatekeeper company, or indeed, an industry defined by a gatekeeper view of the world, is a dangerous place to exist. We’re early in the massive disruption gatekeepers are going to experience. Being attached to one will be to witness — and experience — the corporate equivalent of a massive heart attack: painful and life-threatening. Don’t let it happen to you.

8 Comments

  1. Toni Borges says:

    Thanks for sharing.

    Great read and I certainly agree with the core elements of this digital reality. Although I would point out that this is especially true where the analog world related to consumers (i.e. B2C) presented the mass potential and therefore was taken head-on by the digital possibilities and technological advancement (and some innovative companies and individuals, of course). Further examples of platforms disrupting the status quo where e.g. Music and Movies, Travel Agencies, Analog Photography or Mobile Phones (we all know the names and examples). All of them more or less perished or had to take a massive hit because they didn’t read the signs, were to complacent or just denied the facts of evolution.

    Now as B2C is experiencing some saturation, I believe B2B will be hit regularly too. In this context I believe the incumbents are relevant especially for enterprises that are in the B2B business and/or legacy themselves. Hence, the simplified message that companies like HP, Cisco or IBM are legacy is just partly true as they clearly they also invested heavily in the API economy, Cloud, AI, and so on – at least I can say for sure for IBM with IBM Bluemix Platform, Watson AI and many open standard Cloud services…

    So finally for me there are a couple of lessons-learned that every enterprise should use to answer one key question: “In the digital world: will I be a platform or a feature”… if your answer is I don’t know or neither, you’re in trouble… true also for the disrupted incumbents 🙂

    • Bernard Golden says:

      Toni: Thanks very much for your comment. I found it extremely thought-provoking.

      You make a great point about the initial traction of B2C for innovation platforms now moving into the B2B space, and I agree that it will be disruptive there as well.

      I think you make an outstanding point about companies needing to decide if they are a platform or a feature. Really outstanding.

      WRT the legacy/incumbent technology vendors, I am of two minds. I agree that some of them seem genuinely committed to making the transition to the next generation of technology; others seem to give lip service to the concept but seem mostly focused on doubling down on their historic strengths. In any case, their financial results range from little growth to significant revenue drops, which is striking, given that we are experiencing the permeation of technology throughout our economy and society.

      Thanks again for your comment.

  2. As always great article. Very inspiring and hitting a right points. Thanks Bernard!

    • Bernard Golden says:

      Hi Lukasz: Many thanks for your kind words. I saw that you socially promoted the piece, which I really appreciate. Be sure to subscribe so you’ll get notified of new material as soon as it’s available.

  3. Boris Pieper says:

    I like it a lot. Very well written, although every client using (any) cloud should take a careful look into his use case. I calculated several and found, that the truth of “cheaper” can easily become another. Some clients also reported the same. The most found reason is scalablity and time to market. Its not cheaper, but faster 😉

    • Bernard Golden says:

      Hi Boris: Thanks for your comment and your very kind words. With respect to cloud economics, I address the on-premises/public cloud economics question pretty extensively in this blog post: https://goo.gl/BiUsrd.

      Suffice it to say that, from my perspective, most IT organizations don’t know their true loaded costs and the examples put forward to “prove” that on-premises is cheaper than a public cloud option represent local minima.

  4. Amazingly well written article chock full of great insights Bernard!

    • Bernard Golden says:

      Thanks for your very kind words, Steve! Be sure to sign up to the mailing list so you’ll get informed about new posts stat.

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