Most industries operate on a standard supply chain model as defined by economist Michael Porter in his 1985 book Competitive Advantage, whereby various participants in a linear sequence contribute to the process of assembling a product. Each step in the sequence adds a little more value to the final product. At the end of the process, the finished item is packaged neatly, delivered first to a shop, and then into the hands of a delighted customer.
Sometimes one or more players in the supply chain can exert control over the rest by seizing one key choke point. We call this a value control point.
The crucial difference between traditional business and big Internet platforms such as Apple, Google, and Amazon is that they are not managing a simple linear supply chain. Instead, they run a multi-sided platform business on top of a digital network, where they deal with many intersecting supply chains at once. They host a bewilderingly large range of buyers and sellers on all sides simultaneously.
It would be impossible to attempt to manage the conduct of millions of developers, publishers, marketers, retailers, and others who participate in the vast vaporized ecosystems, and it would also be prohibitively expensive. Instead, the big platform giants concentrate their efforts on maintaining control of just a few key functions that enable them to extract their share of value from all of the
transactions on the platform and also manage the behavior of other participants according to the terms of use.
The platform giants bring order to the marketplace by maintaining strict control. The trick is to maintain just enough control over the entire marketplace to ensure that the merchants and providers—
and especially the buyers—continue to rely upon your platform, but not so much control that you drive key players elsewhere. By controlling key features in the platform, value can be extracted from every transaction, and sometimes from both sides of the transaction. Value is not just monetary: it may consist of marketing value in the form of word of mouth or endorsements or favorable positioning; it may consist of content that is produced in a proprietary format that is captive to your platform; and value might exist in the form of communications and messages that are sent through your platform from one participant to another.
The major Internet platforms have massive distribution power not only because they reach
enormous global audiences, but also because they control a range of marketing and communication channels that every participant in the ecosystem must use to reach those audiences. The big platforms control the way offers are presented, found, and paid for. Finally, the big platforms also control the screens, browsers, and media players that people will use to access digital products.
There are four primary value control points in the Vaporized Economy:
1. Tools for creation: How participants create content on top of the platform
The users of any digital platform generate several kinds of valuable content.
> Primary content: My writing, my photos, my reviews, my lists, my videos, my chats.
> Ambient content/session data: Details of my visits: how long, how frequent, time on site, time on page, page velocity, shopping cart, purchase history. This is sometimes called “data smog”
because we generate it unconsciously through our actions.
> Secondary content: My likes, my bookmarks, my favorites, my lists, my shares, my forwards.
> Tertiary content: My friends and their comments, my groups, my comments.
Each of the big platforms provides its own set of tools and services to make it easier for audiences to generate, save, share, and display the content they produce. For instance, Apple offers free tools like iPhoto, Photos, iMovie, and Mail. Google offers Gmail and Picasa, plus a full suite of video- creation tools at YouTube. User-generated content is a cheap way to foster engagement that adds up to a significant investment of time and effort by users, and that creates a switching cost. Amazon
pioneered the use of user reviews and curated lists to differentiate itself from other online
booksellers, and the company built upon the long-standing tradition of threaded discussion forums to build a lively community on top of commodity content such as ISBN numbers and book descriptions.
Of course, consumer audiences are not the only source of content. Successful platforms also offer tools expressly designed to encourage professional developers to create content and apps. Every giant platform, including Facebook, Google, Apple, Amazon, and Microsoft, runs an active global outreach program to recruit developers. Each of them provides its developers with training and access to application programming interfaces (APIs) and sample code. Some companies offer custom tools for publishing in a proprietary format, such as Amazon’s Kindle Direct Publishing tools or Apple’s iBooks Author. Some platforms collaborate with companies that sell licensed software for professional creators, such as Pro Tools, Logic, and the Adobe image-editing and illustration
software. Apple also publishes professional software tools for content creation, such as Final Cut
Pro.
2. Tools for discovery and communication: How participants discover content and services and communicate about them
How do users sort through a million apps to find the one they are looking for? That’s an important question. Making it easy to find content and apps is just as critical as making it easy to create content.
That’s because most people are not primarily content creators. The old rule of thumb on social media sites was 1:10:100, which is a short way of saying that for every one person who writes an article or posts a video, there are ten people who comment on it and 100 who simply watch or read it without leaving a response. Facebook and Twitter have made it much easier to respond and share. But every major platform must invest hugely in making tools for discovery.
Google dominates this field with search, of course. Microsoft Bing, Apple’s Siri, and Facebook’s newsfeed (which itself was derived from the Twitter newsfeed) can all be considered attempts to design a better way for people to discover fresh content. This is a field of unending invention and ferocious competition. Social discovery systems such as friend recommendations, lists, likes,
favorites, and five-star ratings are public tools for content discovery. One-to-one systems, like email and messaging apps, provide private channels to share information and content directly. As video grows in popularity and gets easier to create, apps like FaceTime, Hangouts, and Skype offer another avenue of discovery and communication.
3. Systems of monetization: How participants get paid for their contributions
Money is like oxygen. Cut it off and the ecosystem withers. While consumers may be pleased to share their information for free, developers must get paid. Otherwise they have a habit of going out of
business. A crucial ingredient in the ecosystem, then, is money. Platform operators must ensure that money flows through the systems to developers in a timely way or they risk losing them to a rival platform.
There are two primary ways to get paid: consumer transactions or advertising.
The Apple App Store and iTunes, as well as Google Play and the Amazon Appstore, are
mechanisms for collecting payments from consumers and sharing revenue back to the developers and professional content publishers. Tens of billions of dollars flow through these stores: they are a primary source of revenue for content publishers in digital media and therefore this is a crucial value control point. The process of submitting content to these stores is a related value control point, as is digital rights management (DRM) software, which is sometimes bound to one particular platform. User identity and customer accounts, and especially credit card information, are yet another related means of controlling value: Apple has nearly 1 billion credit cards on file from customers.
Google utterly dominates the digital advertising industry with the biggest ad server, DoubleClick for Publishers; the biggest ad networks (AdSense, AdMob, and the Google Display Network); the largest ad exchange (DoubleClick AdX); and the largest demand-side platform (DoubleClick Bid Manager, formerly known as Invite Media). It is almost impossible for digital publishers to avoid doing business with Google and its DoubleClick advertising brand.
Most recently, the big Internet platforms introduced subscription content services akin to Netflix and Spotify. Amazon offers Instant Video as part of its Prime subscription program. Apple offers
streaming iTunes Radio and the Beats streaming music service and is expected to announce a Netflix- like subscription video-on-demand service in 2015.
Implicit in transactions and advertising is another lever for value control: user identity and user profiles. The information we provide when we use the platform is collected, organized, and
associated with our identities and user profiles; this information is used to optimize purchase
recommendations and targeted advertising. Each of the major platforms exerts control over hundreds of millions of user identities.
4. Devices and software for content consumption and storage: How information is packaged and presented to end users
The final set of value control points for managing a digital ecosystem consist of all the tools and devices used by consumers to get access to the content and display it.
The original software control point for consumption was the browser, which functions like the lens through which the Web is pulled into focus. Examples of browsers include Google Chrome and
Apple Safari. Microsoft’s old browser was Explorer and the new one is called Edge.
Hardware as a value control point began with computers, then shifted to smartphones and tablets and now includes a range of accessories for devices like televisions. This progression charted a decisive shift away from using digital technology to create and do things towards using digital devices to watch or listen to content produced by others. Apple began with computers and laptops, then introduced a series of iPods, followed by the iPhone, the iPad, the Apple TV, and most recently the Apple Watch. Apple is clearly moving in the direction of consumption; creation is a lower
priority. Google now sells hardware too, in two flavors: Android devices like the Nexus smartphones and a set of laptop computers running the Chrome operating system, plus a smart TV dongle known as Chromecast. Google’s acquisition of Nest puts it in the home with a range of smart thermostats, smoke detectors, security cameras, and other so-called smart devices. Amazon offers the Kindle ebook
readers and tablets as well as a Fire TV accessory. Microsoft also offers Surface tablets, smartphones, and the Xbox game console.
Finally, CLOUD STORAGE is a new value control point that functions like a storage locker for personal media like documents and photos. Just like the Roach Motel, it’s easy to check in but a lot less easy to check out. Amazon is the leader with Amazon Web Services, and every competitor follows: Apple iCloud, Google Drive, Microsoft OneDrive. One way to think about cloud storage is as a new form of bundling. Unlike the pay TV bundle, which consisted of subscription access to channels of content provided by television networks, the new bundle consists of subscription access to the content created by consumers themselves, which is stored in the cloud. Think of photos taken with a smartphone and saved in the cloud drive. It’s a far better business model because the cloud companies pay nothing to acquire the content, and few subscribers are willing to let their
subscriptions lapse, lest their memories and their documents be deleted. Cloud storage of personal content may be the stickiest subscription product ever invented.
Beneath these tools lie the proprietary layers of software that link the entire platform together, such as operating systems, search engines, recommendation systems, provisioning platforms, data
analytics, and user tracking systems.
HOW WELL DOES YOUR COMPANY MAP TO THE VALUE CONTROL POINTS?
It’s obvious that Apple, Google, Amazon, Microsoft, and, to a lesser extent, Facebook offer the full suite of value control points. They can’t afford not to. Some of them are stronger in one area than another: for instance, Apple’s App Store generates twice as much revenue as Google Play, even though there are hundreds of millions more Android devices in use. Conversely, Google dominates advertising. Facebook is dominant in social media and discovery but lacks a range of devices for consumption.
When you contemplate how your company will thrive in the future Vaporized Economy, it makes a good deal of sense to think about not just who controls the ecosystem but also how they do it.
Business owners who plan to launch a platform business must ensure that their product offering conforms to, or improves upon, these four value control points. What you may find is that some companies do not map very well to these four points at all.
Consider your value control points carefully as you evolve your own business in the future. Are you building a business for the new information economy or are you stuck in the old mechanical one?
ASK YOURSELF
> In your field, is there one central switchboard to connect buyers and sellers? How efficient is it?
Can you do the job faster and cheaper, with less friction, using software?
> Has a winner-take-all effect happened in your industry yet? If so, can you identify the points of lock-in? Are there weaknesses, such as inefficiency or a high entropy bill that starves ecosystem participants?
> Does your company invest in physical inventory or in software tools to enable others to market, manage, and promote their inventory?
> What are the value control points in your industry? How well do these translate to the digital domain?
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