Products to Platforms: Making the Leap
BUSINESS MODELS
F
by Feng Zhu and Nathan Furr
From the April 2016 Issue
or years, Microsoft’s Outlook has been losing ground to Google’s Gmail and to
the e-mail apps integrated into iPhones and other mobile devices. But now the
company is trying to inject new life into Outlook, attempting to transform it
from a simple e-mail product into a platform that connects users to a multitude of
third-party services such as Uber, Yelp, and Evernote. Whether or not the leap from
product to platform works is an immensely important question—not just for Microsoft
but also for a growing number of businesses built around products or services.
The appeal of such a move is understandable. Products produce a single revenue
stream, while platforms—which we define as intermediaries that connect two or more
distinct groups of users and enable their direct interaction—can generate many. Indeed,
a large number of the world’s most valuable companies by market capitalization in 2015
were platform companies, including five of the top 10 (Apple, Microsoft, Google,
Amazon, and Facebook). Although some of those companies started with platforms,
many started with products: Amazon launched as a retailer in 1994 and six years later
/
introduced Amazon Marketplace; Google began with a search engine in the mid-1990s
and then introduced search advertising in 2000; and Apple created the iPod in 2001 but
didn’t move toward a platform until it developed the iTunes Store in 2003 and the App
Store in 2008.
Not every company, however, makes the leap successfully. To understand why some
enterprises pull it off and others don’t, we studied more than 20 firms that have tried to
become platform providers. On the basis of that work, we have identified four steps that
can make the difference between effective transformations and failure.
1. Start with a Defensible Product and a Critical Mass of Users
Too many companies believe that a platform move will somehow revive a struggling
product. That’s a mistake. A great platform starts with a great product—one that claims
a critical mass of customers and provides enough value to keep them from defecting to
competitors (in other words, is defensible). The product must also attract enough
frequent users to make the potential platform appealing to third parties. After all, no
platform can thrive unless it creates value for those third parties.
Consider the case of Qihoo 360
Further Reading Technology, one of the largest internet
For more insights into changing firms in China. It started out in 2006 by
business models, see the following: selling 360 Safe Guard, a security software
product. Then Qihoo began giving the
“The Prius Approach” product away free—an unusual move at the
Nathan Furr and Daniel Snow time—both to build its user base and to
HBR, November 2015 capitalize on a unique feature: the antivirus
software’s ability to learn and improve.
“Why There Are No Bosses at Valve” Qihoo’s servers, unlike those of its
Claire Suddath competitors, not only kept a “blacklist” of
Bloomberg Business, April 27, 2012
malware that 360 Safe Guard had detected,
“A Billion Dollar Company with No but also compiled a “whitelist” of the safe
Bosses? Yes, It Exists” programs most frequently found on users’
Samuel Wagreich computers. The more users who installed
Inc., March 4, 2013 360 Safe Guard, the more information
/
“Business Model Innovation and Qihoo could gather for both lists, and the
Competitive Imitation: The Case of faster the software could identify viruses
Sponsor-Based Business Models” and suspicious files when it conducted a
Ramon Casadesus-Masanell and Feng scan. The positive feedback loop improved
Zhu the product with every new user, which in
Strategic Management Journal, April 2013
turn attracted more new users.
“Microsoft’s Bid to Make Outlook More
Than Email” The broad user base for Qihoo’s core
Feng Zhu security product proved an immensely
HBR.org, August 18, 2015 valuable asset in creating a new platform.
Third-party software firms were eager to
“Qihoo” make Qihoo a channel for reaching
Feng Zhu customers, and Qihoo generated profits
HBS Case Study 615-017 from connecting them. Qihoo itself also
tapped into its user base to introduce and
“SF Express: From Delivery to E- market its own new products. For example,
Commerce”
Feng Zhu and David Lane the company used its security software to
HBS Case Study 616-003 cross-promote its web browser, and it used
its browser to promote its search engine,
both of which quickly gained significant
market share. Qihoo then created an
advertising platform on top of its browser and search engine. Because the company so
effectively transformed its early product successes into platforms, competitors had
difficulty catching up.
Note that Qihoo’s product defensibility was rooted in a core competency: its ability to
leverage strong learning effects. Companies can, of course, take advantage of other core
competencies in building defensible products. Apple, for instance, capitalizes on its
design capability; Amazon leverages its strength in logistics.
But note, too, that popularity doesn’t necessarily make a product defensible. For
example, in 2014 Qihoo introduced the 360 Android Smart Key, a device that plugged
into the earphone jack of Android phones, allowing users to control the phone’s
flashlight, camera, and other functions by pressing a single button. Qihoo distributed
/
one million Smart Keys free of charge to college students in hopes of building a critical
mass of users and converting the device into a platform. Users loved it, but it was not
defensible: Competitors such as Xiaomi built similar products, and Google later
incorporated similar features into its Android operating system. Qihoo never managed
to turn the Smart Key into a platform.
2.Sharing
ApplyNew
a Hybrid
ValueBusiness Model Focused on Creating and
It has long been assumed that leaders must commit to either a product-based or a
platform-based business model, because each demands a particular approach to
resource allocation and operations. But we found that firms making successful
transitions from product to platform often employ a hybrid model.
It’s foolish to think that moving to a platform
will revive a struggling product.
In a product business model, firms create value by developing differentiated products
for specific customer needs, and they capture value by charging money for those items.
In a platform business model, firms create value primarily by connecting users and
third parties, and they capture value by charging fees for access to the platform.
Platform models bring a shift in emphasis—from meeting specific customer needs to
encouraging mass-market adoption in order to maximize the number of interactions, or
from product-related sources of competitive advantage (such as product differentiation)
to network-related sources of competitive advantage (the network effects of connecting
many users and third parties).
A hybrid of the two business models is valuable in part because during the product-to-
platform transition, although customers start to derive benefits from the use of third-
party products, a firm’s own products often remain the primary attraction. We
observed, for example, that users of 360 Safe Guard benefit from the access to many
safe third-party software products, but the main draw for them is still 360 Safe Guard.
Likewise, Amazon users derive significant value from third-party sellers, but what they
prize most is being able to obtain products directly from Amazon. Thus successful
product-to-platform transitions require firms to engage in activities to increase the
/
value of the product while also trying to attract third parties. Indeed, Qihoo continued
to improve the quality of 360 Safe Guard, even as it gave away free copies and sacrificed
millions of dollars in revenue in order to grow the user base.
Hybrids in general can be useful adaptation tools, and hybrid models can be especially
useful for transitioning to a platform-based business because they enable firms to
identify new opportunities to create and capture value without abandoning their core
customers. The stumbling block for most firms attempting the leap from product to
platform is a “product mindset” that views the value pie as comparatively fixed and thus
leads to a focus on claiming as much of that pie as possible. But if companies instead
follow a hybrid model, applying a “platform mindset” on top of a product mindset, they
are likely to discover ways to create new value for existing users or nonusers that might
not otherwise have been visible.
A case in point.
Consider the computer-game developer Valve, founded in 1996. Valve’s first product, a
video game called Half-Life, proved very successful—so much so that external hackers
started developing their own modifications to change the game play. These
unauthorized “mods” often made the game unstable and created barriers between users
who wanted to connect and play against one another. Rather than fight the trend, Valve
recognized that there was an unmet demand for an alternative to Half-Life—and thus
the potential to create new value. Consequently, the company hired the hackers who
had created the most popular mod and encouraged them to turn it into a second game,
dubbed Counter-Strike. Still, a growing number of mods continued to create serious
problems for Valve users. To fix those, the company distributed patches through an
online software channel it created in 2003 called Steam.
Initially Valve included Steam in all the games it sold, but as the number of users
swelled, company leaders realized that Steam could be transformed into an online
platform to solve a major challenge for all PC game developers: distribution. At the
time, most game developers had to ship physical boxes of software to retailers, which
was costly and slow. Steam, by contrast, allowed developers to distribute their software
titles instantly and at no marginal cost—a value proposition attractive to both gamers
and game producers, particularly those producers who did not have access to big-box
retailers. /
Firms stumble when a “product mindset”
leads them to view the value pie as fixed.
Valve discovered new sources of value by capitalizing on independent developers’
interest in using Steam to distribute their own games. The availability of more and
more games drew more and more customers to the platform, including many who had
not previously purchased Valve products but who were now downloading Steam and
buying various games. Although Valve continues to sell its own software to users, today
it makes much more money by taking a small percentage of every sale by other
developers.
Turning threats into opportunities.
Shifting from a product mindset to a platform mindset can be downright
counterintuitive—indeed, several of the firms we studied discovered new platform
opportunities almost by accident and in spite of their own missteps. For example, Lego
Mindstorms (the entry-level robotics toy) emerged as a platform only after a Stanford
graduate student hacked the robotic-controller code. Lego’s leaders initially had a
product-mindset reaction: They sent a cease-and-desist letter to protect the “fixed”
value pie. But after some reflection, they saw the hacking as a sign of untapped value on
the demand side. If Lego turned the Mindstorms software into a platform, then it could
be used as an education or experimentation tool, not just a toy, and the company would
sell many more units and bring many more users into the ecosystem. So Lego switched
course—and mindset—to embrace a hybrid business model.
Similarly, the first iPhone was a closed-system product with a handful of apps produced
by Apple. As it became more popular, hackers began to “jailbreak” the phone so that
they could install their own apps. Steve Jobs was initially determined to protect his
integrated product ecosystem, and he vigorously opposed opening it to third-party
apps. So, like Lego, Apple first reacted to the hacking by going on the defensive: It made
the phone’s operating software more secure and threatened to void the warranty if a
jailbreak had been applied. Eventually, though, Jobs saw the wisdom in creating a more
open platform, and a year after launching the iPhone, Apple opened the App Store.
Today the company captures immense value from its hybrid business model, selling its
own products and taking a 30% cut of platform sales. The latter amounts to
considerable revenue, given that 75 billion apps were downloaded in 2014. /
3. Drive Rapid Conversion to the New Platform
A viable product and business model won’t guarantee success. It’s also important to
convert users of your products into users of your platform. Three elements are key.
Provide adequate value.
The proposed platform needs to create sufficient new value for customers to start using
it. Valve’s Steam and Qihoo’s 360 Safe Guard both accomplished this. SF Express, one
of China’s leading parcel delivery services, has not. Facing intense pressure from lower-
cost rivals, SF Express in 2014 launched an e-commerce platform connecting its large
customer base to third-party merchants. It also opened hundreds of brick-and-mortar
stores where shoppers could use tablets to order products from the affiliated
merchants. SF Express would then deliver the products to the stores, where consumers
could try them and return them immediately if they wished. But people did not flock to
the stores; they didn’t see much value in the “try and buy” concept because Chinese
retailers already let customers return most merchandise purchased online within seven
days.
Stay consistent with your brand.
Companies can accelerate conversion to the new platform by carefully adding new
products and services that are consistent with their brands. Qihoo opened an app store
to third-party software developers and used its technology to ensure that the apps sold
there were free from viruses and malware. This occurred in 2007, when viruses were
rampant in the Chinese software market. Many users became more willing to use
Qihoo’s security product because it allowed them to download third-party apps virus-
free. A positive feedback loop arose: More users attracted more third-party developers
to the platform, which in turn attracted more users. Likewise, when Qihoo offered its
own browser and search engine to its users, safety was positioned as the core feature of
these products. These connected products took advantage of the company’s core
capability in security and helped enhance Qihoo’s brand image.
Involve users in improvements.
Firms can actively open pathways for people inside and outside the firm to enhance
both the product and the platform. Minecraft launched in 2009 as a stand-alone
building-block game, but it’s now a wildly popular platform (which Microsoft acquired
in 2014 for $2.5 billion). In addition to releasing a series of updates to increase the
/
product’s appeal (by allowing players to compete against one another, for example, and
offering a “survival mode” to make the game more dangerous), the maker of Minecraft
also created channels for third parties to contribute their own improvements. For
example, it allows third-party developers to create and sell modifications to the game,
and in 2012 it even hired some of the most prominent Minecraft modifiers to work with
and support other third-party developers in the Minecraft community. In a similar
fashion, when Valve noticed that many customers wanted to trade items related to a
video game (such as objects discovered as part of a game quest), it added a marketplace
within the Steam platform where users could trade and interact, which provided yet
another source of revenue.
4. Identify and Act on Opportunities to Deter Competitive Imitation
The product-to-platform transition, like any business model innovation, will invite
imitation when it succeeds. One effective way to fend off copycat competitors is to
identify and control the openings for value creation.
The case of MakerBot offers a cautionary tale. The company created the first widely
adopted desktop 3-D printers and then built on its popular products by introducing a
platform called Thingiverse, which allowed users to share or sell designs to be printed.
The platform accelerated the adoption of MakerBot’s printers and helped the firm
establish itself as the dominant brand in consumer 3-D printing. But MakerBot had
used open-source designs to build its original models, and new competitors were able
to leverage the same designs to enter the market. Similarly, many of the object designs
created for MakerBot use the industry’s standard file format and are compatible with
competitors’ 3-D printers. While the company continues to explore opportunities for
capturing value from the platform, such as allowing designers to charge fees to those
who download their designs, it faces intense competition because it failed to develop
proprietary design specs.
Thus when there are opportunities for competitors to quickly imitate a product-to-
platform transition, firms should consider which aspects of their platform ecosystems
to own and control themselves and which should be offered by third parties. Firms
might want to create proprietary standards or direct their equity investment and
acquisition activities so as to erect barriers to competitive imitation. They might also
/
consider exclusivity contracts with partners that are in a position to choke competitors’
growth. For example, a platform owner’s exclusive agreement with, say, PayPal, the
runaway leader in peer-to-peer payments, could thwart would-be competitors using
less popular payment mechanisms.
Finally, because the digital world evolves quickly, platform owners should always be on
the lookout for new growth points, and they should be thoughtful about controlling
them. Qihoo, for example, gave third-party software developers opportunities to
distribute all kinds of applications to users of its security products, but it developed its
own web browser and used its default home page to capture value from advertisers.
Developing its own search engine and promoting that through its web browser also
allowed the company to capture value through search advertising.
The Outlook for Outlook
Let’s get back to Microsoft’s attempt to transform Outlook into a platform. Outlook e-
mail clearly has a critical mass of users and some defensibility, thanks to its being
bundled with Office Suite and Microsoft Exchange. And Microsoft has had both a
product mindset and a platform mindset for years.
Firms should consider which aspects of their
platforms to own and control.
Where the transformation may stall is in the third and fourth steps: converting users
and cutting off competition. Although Microsoft has added new services to Outlook—
PayPal, Uber, Yelp, Evernote, and others—it is not clear that the integrations create
enough value to drive rapid user adoption of these services, because they’re all also
available as stand-alone apps—and popular ones at that.
Even if Microsoft can drive rapid conversion, it also has to erect barriers to imitation. If
the new Outlook platform catches on, what’s to keep Apple and Google from following
suit with their e-mail clients? Third parties will want to partner with Apple and Google
to attract more users, particularly on mobile devices—an area where Outlook is weak.
And although Microsoft has already purchased a few third-party apps (such as
Wunderlist, a popular mobile to-do list and task management program) to prevent
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them from partnering with its competitors, those acquisitions are probably not enough
to keep other companies from imitating its strategy successfully. Indeed, Microsoft’s
business model innovation could end up benefiting its competitors. Moving from
product to platform is treacherous, and how Microsoft—and many others
contemplating similar moves—handle the challenges we’ve described will determine
their success.
A version of this article appeared in the April 2016 issue (pp.72–78) of Harvard Business Review.
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.
Nathan Furr is a strategy professor at INSEAD and a coauthor of Innovation Capital
(HBR Press, 2019), Leading Transformation (HBR Press, 2018), and The Innovator’s Method
(HBR Press, 2014)
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Lukas Kauke 3 years ago
In my research regarding “platform-business”, I noticed that all the writers/ contributors of this article are
mainly concerned with the topic of platforming in the business to customer marketing. I was wondering if
someone already thought about platforming in business to business marketing. While (in my opinion) digital
platforms have established very strongly in B2C marketing within the last few years, it seems that platforms
do not play any role in business to business marketing. How do you justify this observation?
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