Parallel Platform Strategy Theory: Why Kindle, iPad and iPod are Making a Fortune

With headlines such as "the shock of E-books", "the truth about electronic books", "Amazon's true character" and "The yin and yang of E-books," expectations and concerns about E-books have been a dominant theme in business magazines during 2010.

Parallel Platform Strategy Theory:
Why Kindle, iPad and iPod are Making a Fortune
Tatsuyuki Negoro
Professor, Faculty of Commerce, Waseda University

Japanese Companies Pioneered Digital Books

This was in response to the impact of the launch of Apple's iPad this May, which followed the release of Amazon's Kindle in November 2007. However, E-books did not start with these machines (hardware); Japanese companies have pioneered this field, marketing a range of products since the 90's.

For example, NEC launched a product called digital book, using floppy disk media, in 1993 (hardware for which I also contributed content). The next initiatives from Japanese companies came around 2004 when Matsushita Electric Industrial Co. Ltd (now known as Panasonic) launched Sigma Book and Sony released LIBRIé onto the market. However, although Matsushita released Words Gear in 2006, which incorporated a color display, it failed to catch on, and in March 2008, manufacture of E-book terminals ceased, followed by the termination of the distribution service on September 30 that same year. Sales of Sony terminals in Japan ended in May 2007, and the distribution service met the same fate in February, 2009.

Why weren't these attempts by Japanese companies successful? Of course it could be said that this failure was to the result of insufficient hardware functions. I would like to suggest, however, that it also stemmed from the inability of Japanese Companies to develop a strategy with an understanding of the structure of the digital book business. This is the same issue that caused Sony to lag behind the Apple iPod in the music download market.

I would like to explain this situation using my Parallel Platform Strategy Theory (please refer to Negoro & Kamaike 2010 for further explanation).

What are Platform Products and Services?

This refers, for example, to the function game machines (hardware) provide for game software as a complementary product, or the function which an OS provides for applications.

A media function provides mediation, settlement, and a community function to the player group on a platform. It denotes the function by which different users on a platform may meet and through which players may communicate and interact with each other. Platform goods and services revolve around having a basic function such as an OS, and a media function such as SNS. Since there are different groups engaged in interaction, the market for platforms and services which have media functions has at least two sides/player groups. Although this is generally referred to as a multi-sided platform, there have been movements in the world of economics and business administration towards terming it a two-sided platform theory where two sides are involved (Rochet and Tirole, 2003; Caillaud and Jullien, 2003; Eisenmann, Parker and Van Alstyne, 2006; Hagiu and Yoffie, 2009; et al).

Theory of the Parallel Platform Market

Parallel Platform Market theory is a concept which argues that the market has become one in which this two-sided platform is made up of one set. To be precise, the Parallel Platform Market is defined as the market where the platform providing complementary products (content) and the platform using complementary products—mediated by a common platform (a binding platform of standards, specifications, or business infrastructure)—exist as a set in parallel. The side of the platform providing content as well as the side of the platform for display themselves become a two-sided market.

Parallel Platform Structure

In the E-book or music download market, a parallel platform market is realized because the communications network and file format serve as a joint platform which binds the platform on the content provision side and the platform (hardware) on the playback (display) side. This theory also pertains to the software industry. Markets where the Web server (the content provision side software) and the web browser (the content display side software) become a set, streaming media markets and RIA (Rich Internet Application) markets, for example, all fall within the scope of this parallel platform market theory.

Business Challenges Specific to the Parallel Platform Market

The problem here is the two-sided platform and the existence of business challenges unique to the parallel platform market derived from this set. Here are some examples of successful products and services which have handled these challenges.

(1) Management of Network Effects

The phenomenon in which player groups interact with one another is called the network effect between sides. For example, the more content there is to read, the greater the appeal of the e-book terminal.

Meanwhile, the network effect operating within the same player group is known as the network effect within a side. The function Kindle provides which quotes a text from the book currently being read and posts it on Facebook or Twitter by virtue of a software upgrade in May, 2010 is aimed at promoting such a network effect.

(2) Management of the Profit Differential

A two-sided or parallel platform enables pricing which considers both sides or platforms as one whole (Rochet and Tirole, 2003, Eisenmann, Parker and Van Alstyne, 2006). Specifically, the product or service of one side can be provided at a reduced cost or free of charge. This intentional imbalance in the pricing between sides or platforms is called management of the profit differential.

iPods would not have spread so successfully without the service content offer made by its own company (through iTunes Music Store) of one dollar for one track, a drastic reduction in the price of music downloads up to that point in time. The pricing was such that profits would result from the first stage of the hardware purchase, with iPod being the product platform, rather than from the side of the content platform (iTunes Music Store). This was the first instance of a strategy made through provision of a product and service for both sides of the parallel platform.

This is a primary reason for the success of Kindle with its model which did not impose communication fees (it can be argued that communication costs attached to the hardware were supported).

(3) Management of the Platform Product as a Set

Providing a product with both sides of a parallel platform stimulates the network effect between the platforms (the network effects between sides), increasing the appeal of a parallel platform. Moreover, by providing the products and services of both sides and using both as a set, functions can be implemented as never before.

With iPad, the principle that all iPhone applications could be used was significant from the onset. This kind of product development was made possible precisely because Apple controlled both the sales of iPhone applications (through apple store) and the supply of the product hardware.

(4) Management of the Joint Platform

When providing a product and service for both sides of a parallel platform, in order to secure further profits, it is advantageous to make the binding platform a unique format.

Conversely, whether it is possible or not to access the same format as the binding platform of the company that launched it poses a problem from the point of view of competitors. Generally, when access is refused, competitors try to compensate for the shortage of content by adopting a more open format, but this will often result in a smaller profit margin.

iPod and Kindle provide products and services for both sides of a parallel platform, with a unique file format which connects both sides. This means that music obtained from iTunes Music Store may only be accessed through iPod and that E-books obtained from Kindle store may only be viewed with the Kindle hardware (or Kindle browsing software).

(5) Multihoming Management

Two or more platform products and services may be used in parallel. Additional costs resulting from using two or more services are known as “multihoming costs." The cost of purchasing additional hardware and the time and effort involved in using two or more services are examples of multihoming costs.

Even without the Kindle hardware it is possible to view E-books bought from the Kindle store, on say a PC or iPad, with the software Amazon provides. This is a strategy to boost sales of E-book profit sources by targeting not only those consumers who have Kindle software but also PC and iPad users Amazon allows to multihome its content.

The Failure of LIBRIé

Having explained above each factor for successful products and services, I would like to take a brief look at what happened to Sony's LIBRIé, for example. In the case of LIBRIé, Sony instituted a system of renting E-books (content) through Timebook Town, a digital book distribution site it exclusively owned. Initial rental was for a limited period of 60 days, with data being made unavailable after that time.

While this was perhaps driven by negotiations with the publishing industry, it could not create the convenience of having the products and services of both sides and it failed to manage the profit differential and to create a network effect between the sides as a result. Although this failure is regrettable it is also inevitable when viewed from the perspective of our Parallel Platform Strategy Theory.

Reference

Competitive strategies characteristic in the "Parallel Platform Market" of software products ( Tatsuyuki Negoro and Sota Kamaike, Working Paper No. 34, Research Institute of Information Technology and Management, Waseda University)

Tatsuyuki Negoro
Professor, Faculty of Commerce, Waseda University

Profile
Born in 1952, Tatsuyuki Negoro is currently professor at the Graduate School of Business Administration and head of the Research Institute of Information Technology and Management at Waseda University. Having graduated from Kyoto University (majoring in sociology), he received his MBA from Keio University's Graduate School of Business Administration. He occupies his present post having worked at a steel corporation and spent time as a visiting researcher at Hull University, England and as a professor at Bunkyo University. He has been chairman of the Japan Society for Management Information, head of the International Academy of CIO, executive vice-president of the CRM Association, and chairman of the Executive Leaders Forum. He specializes in the integrated fields of management-strategy theory, information system theory, and systems methodology.

Professor Negoro's works include:
Information and Management Strategy for CIO's: A Fusion of IT and Management
(Chuokeizai-sha Inc., 2010, edited)
Mixi and the Second-generation Net Revolution (Toyo Keizai, Inc., 2006, edited and co-authored)
The Strategy of Substitutes: Tried and Tested Attack and Defense Tactics (Published by Toyo Keizai, Inc., 2005)
Management Strategy for the Digital Age (Editor. Published by Media Select, 2005)
Resource-Based Management Strategy Theory (Toyo Keizai, Inc., 2004, co-translated)
Open Partnership Management (PHP, 2002, co-authored)
The Future Strategy of Medicine Manufacture and the Medical Industry (Toyo Keizai, Inc., 2001, co-authored)
Management Strategy and Corporate Reform (Asakura Publishing Co., Ltd., 2001, co-authored)
Management Strategy for Net Business (JUSE Press. Ltd., 1999, co-authored)

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