Where Einstein Meets Edison

The Dummies Guide to Building an Ecosystem

The Dummies Guide to Building an Ecosystem

Apr 22, 2011

Business academics often resort to eye catching headlines to grab attention to topics that they only have a vague answer to. Case in point? Well, the article you’re reading right now. Wait, before you run away — I do have something substantial to offer. FACTS! Yes, fresh data emerging from work at the MIT Mobile Innovation Group  where I help Professors Jason Davis and Pai-Ling Yin study perhaps the first marketplace for innovative activity that can be monitored closely — Appstores.

Economists and Appstores, really?
For the first time, Appstores present a secluded market that is a dream laboratory. We can observe things that happen in the marketplace with extreme precision — daily price reactions, strategic response to competition, firm entry and exit, firm success, imitation, product development and portfolio management — you name it. Via work at the MIT Mobile Innovation Group we hope to get at these questions that occupy realms and realms of paper in the tech press daily. Something MIT professor Bengt Holmström (and Nokia board member since 1999) calls “trillion dollar questions”.

So what’s your “trillion dollar question”, wise guy?
Imagine you have cool social data (like twitter, facebook, quora, foursquare, yada yada). There are a million-and-one things you could do with it. You could do something incredibly useful like use twitter data to provide stock market advice or create something inane like an iPad app for your cat or build something a little creepy like an app to count women in bars using data from foursquare. Most firms realize that the best way to focus on your core product while at the same time profiting from thousands of its potential applications is by pursuing what is now known, to use a businessy term, as a “platform strategy”.

Step 1: Roll out an Application Programming Interface (API) — basically an easy way for developers to use your data in a secure and reliable way. Step 2: Create some libraries and help files to get developers get started. Step 3: Sit and enjoy the fruits of your labor as hundreds of applications get created around your platform.

You gain by making your core platform more valuable (and by adding thousands of new users in the process who suddenly find it more attractive to join your platform) and developers gain by building successful, profitable business without having to worry about developing a captive base. Imagine having to create the social games behemoth Zynga (yes, I’m looking at you Farmville players) without first having the underlying infrastructure that Facebook provides?

So good, build an ecosystem – what’s the problem?

Let’s take the case of Twitter.

Imagine you are a twitter developer who uses the twitter API in cool ways. Everything’s going fine. Then comes something new and shiny that every cool kid you know owns. The iPhone. People now want to tweet not just when they’re at home staring blankly at their computer screens, they want to tweet when they’re in the bathroom, when they’re at the party or when they’re proposing to their girlfriend. Twitter is busy dealing with their failwhales but not to worry! There is an army of developers already out there trying to get rich by creating twitter clients overnight. In no time there are a number of excellent options for twitter clients out there and everyone’s doing great.

Then? April 2010, twitter decides that the iPhone cake is too tempting to resist. It acquires a leading twitter client (tweetie) and names it the “official twitter” app for the iPhone. Result? Everyone is now using the official twitter app and all the other developers developing for the platform on the iPhone are incredibly pissed.

Case in point: Dewald Pretorius, a twitter developer:
‘Twitter has just kicked all the other developers of Twitter iPhone (and iPad) clients in the teeth. Big time. Now suddenly their products compete with a free product that carries the Twitter brand name, and that has potentially millions of dollars at its disposal for further development.  It’s really like they’re saying, “We picked the winner. Thanks for everything you’ve done in the past, but now, screw you.”‘

Another twitter developer I spoke to conceded:
“I have to say that realistically this is what you have to be prepared for when working with third-party services – iPhone, Android, Twitter, Facebook, etc etc all have the same weakness: if the company takes a fancy to your competitor, or clones your functionality, then you’re likely toast.”.

So this is the central issue — developers know that if they invest effort and create something really valuable on a platform, nothing prevents the platform from expropriating their idea and leaving them with nothing. And if you thought game-theoretically about this,   such innovative ideas and developer effort would be in short supply for fear of exactly this kind of expropriation.

How can platforms credibly commit to their future platform partners that they will not step on their toes? That, is the trillion dollar question.

This is all humbug! Where is the proof?

I have no solutions, but I have preliminary proof to show that this is a real problem ecosystem owners face. Remember how I promised some data? Well here is some data to show what was happening as far as development around the Twitter API on the iPhone was concerned.

Graph #1: Twitter-app activity by month on the iPhone.

Notice how twitter activity (measured by the sum of updates, new app creation and price changes) suddenly drops on the iPhone around the time of the acquisition?

Graph #2: Twitter-app activity has gone down mainly due decreased entry rather than decreased average app activity

Notice how the average app activity drops only a little while the overall activity drops by a lot? Reason? — the number of new twitter apps being made for the iPhone has dropped precipitously!

Graph #3: What’s up with Facebook apps on the iPhone?

 

You might wonder if this is simply due to a general decrease in interest around the iPhone platform (it has over 300000 apps after all!) — well, Facebook which has publicly and repeatedly committed to staying out of the apps business seems to be doing just fine!

What next?

There is much more coming from the Group so stay tuned to MITER. A quick plug before I close: we’re looking for people to join the team and collaborate with us on the many ideas we have. If you are an undergraduate at MIT, apply to our UROP position for the summer and beyond! And if you work in the apps business we really really want to hear from you. Write to me! And thanks for listening!

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