Dr. Petri I. Salonen Views on Life, Entrepreneurship, and Software Business

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The Business of Platforms for Software Companies

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Software and Product Platforms

Product platforms or software product platforms have been an interest of mine since my doctoral dissertation from 2004. The topic is not new and there are a few authorities that I have been tracking since I was working on my dissertation “Evaluation of a Product Platform Strategy for Analytical Application Software“. The topic has been on my radar screen since my public doctoral defense and I was very happy when Michael A. Cusumano, Annabelle Gawer, and David B. Yoffie published a new book of the platform concept in May 2019. This book “The Business Of Platforms – Strategy in the Age of Digital Competition, Innovation, and Power” tells the story of platform evolution and research in a fantastic way.

I am in the fortunate position to work with global software brands and specifically in the business model transformation that often entails a change of architectural model from on-premises delivery model to public cloud delivery model and many organizations have realized that the approach that they should take is very different from the past. Some organizations want to become the center of the ecosystem by having a consumable platform with well-defined application programming interfaces (APIs) that not only creates “stickiness” to the platform but also creates new opportunities for the software vendor to grow.

What is a platform?

There are many different definitions for a platform, but in general, a platform “connect individuals and organizations for a common purpose or to share a common resource”. Dr. Cusumano et al, refer to industry platforms that are positioned at the level of an industry (or ecosystem). Furthermore, a platform “brings together individuals and organizations so they can innovate or interact in ways not otherwise possible, with the potential for nonlinear increases in utility and value“. The authors argue that “the best platform is more important than having the best product.”

One of the key aspects of having a platform is to be able to take advantage of “network effects” that are positive feedback loops that come from connecting different users and market participants to each other. This is how Dr. Cusumano et al. portrays with the recognition that building a platform business requires an organization to look a the competitive strategy and also define very different revenue models for the platform.

The authors divide platform companies into companies either with a transaction platform (Uber, Airbnb, Windows Store, Salesforce Exchange etc.) or as innovation platform (Microsoft Azure, Force.com, Amazon AWS, IBM Watson, Apple iOS, etc.) Organizations having both are hybrid companies that have both business models.

Platform Approach in the context of a software company

If a company bases its software product development on a public cloud platform such as Microsoft Azure, the most typical scenario that I have seen is to build a vertical platform strategy where the software vendor focuses on adding value-added layers on top of the public cloud. These value-added layers, if architected correctly, can be seen as a product platform that becomes the foundation for the software vendor to invite other third-party developers to participate in the development by using published APIs.

I have seen this trend to become stronger among software vendors as these vendors want to become the “center” of the vertical ecosystem and create stickiness or dependency on the platform. From a business perspective, this makes a lot of sense, but the requirements of being a product platform vendor versus being a product vendor are considerable. The prior approach requires much more from the software vendor, but the results could be very rewarding when executed well.

If you are in software products business or creating intellectual property for an organization, I highly recommend you to spend some time learning about the product platform theory and related topics. One of the key elements in software product platforms is software product line engineering, which I will come back in later blog entries.

Platform Resources