Thomas Eisenmann, Geoffrey Parker, Marshall Van Alstyne
Revised, August 11, 2008
Due to network effects and switching costs, platform providers often become entrenched. To dislodge them, entrants generally must offer revolutionary products. We explore a second path to platform leadership change that does not rely on Schumpeterian creative destruction: platform envelopment. By leveraging common components and shared user relationships, one platform provider can move into another’s market, combining its own functionality with the target’s in a multi-platform bundle. Dominant firms otherwise sheltered from entry by standalone rivals may be vulnerable to an adjacent platform provider’s envelopment attack. We analyze conditions under which envelopment strategies are likely to succeed.
Keywords: Platforms, network effects, bundling, two-sided markets, complements, convergence
Platform-mediated networks encompass network users along with intermediaries who provide components and rules that facilitate users’ interactions (Gawer & Cusumano, 2002; Rochet & Tirole, 2003; Eisenmann, Parker & Van Alstyne, 2006; Evans & Schmalensee, 2007). Examples are as diverse as video games, container shipping, credit cards, instant messaging, package delivery, web search, real estate brokerage, HMOs, shopping malls, DVDs, online dating services, travel reservation systems, stock exchanges, and barcodes. Such businesses comprise a large and rapidly growing share of the global economy: ranked by market value, 60 of the world’s 100 largest corporations earn at least half of their revenue from platform-mediated networks (Eisenmann, 2007). Established platform intermediaries can be difficult to displace. They are sheltered by network effects (Farrell & Saloner, 1985; Katz & Shapiro, 1985; Economides, 1996), switching costs (Klemperer, 1987), and endogenous sunk costs for R&D, infrastructure, and marketing (Sutton, 1991). To dislodge entrenched...