Platform ecosystems (7): Rainforests or walled gardens: How open should your ecosystem be?
This is the final of seven blogs on platform ecosystems. All blogs can be found on Blogs – Organizational Revolution
A major decision for platform ecosystems is the extent to which an ecosystem should be open to everyone. A closed ecosystem has its benefits in terms of coherence and regulating competition, but it runs the risk of not sufficiently tapping into the creativity and capability of others. An open ecosystem may benefit from the latter, but has considerable costs in terms of governance (as pointed out in my previous blogs). Haier’s CEO Zhang Ruimin introduced the walled garden versus rainforest metaphor to clarify the difference. A neatly maintained walled garden (closed ecosystem) has its pros, but does not have the richness and diversity of a rainforest (open ecosystem). So what is the optimal level of openness? As with any business issue, the correct answer to this question is: it depends. But on what? I will discuss that below, but first: what is openness?
What is openness?
Openness of platforms ecosystems is about four questions:
- Who is allowed access to the ecosystem? Is anyone allowed in or only partners that meet certain strict criteria?
- What do partners get access to? Is it data, source code, clients, or can they participate in decision-making processes?
- To what extent do they get access? For example: do they get access to all data forever or to a part of the data for a limited period of time?
- How easy is access? Can partners just sign up via a site or is there a procedure to vet prospective partners?
The question of openness is not a simple yes/no issue. There are many variables to consider and hence there are many grey areas. Roughly we can distinguish between three prototypes:
- Closed ecosystems characterised by centralized ownership of intellectual property and a limited number of partners that co-create new functionality. In this case the platform often is the product sold to customers. Think about SAP Hana or Microsoft Windows.
- Managed ecosystems have centralized ownership, but permit a larger number of partners to cocreate new functionalities, usually via standardized interfaces. Facebook and Apple are examples here.
- Open ecosystems in which all intellectual property is shared with anyone who wants to co-create new functionalities. Android and Linux are known examples here.
When to be more open or closed?
I identified nine relevant questions to ask to get a sense of how open your ecosystem should be. The nine questions are in the table below.
|How essential is the platform for monetization?||If you make your money by selling subscriptions or licenses to the platform, closed is a better option. If you monetize the platform by selling complementary services, a more open ecosystem may make sense|
|Do consumers fear becoming locked-in to one technology?||If they don’t, your platform ecosystem can be more closed; if they do, you can be more open|
|Do ecosystem partners fear becoming locked-in to one technology?||If they don’t, your platform can be more closed; if they do, you can be more open|
|Do the benefits of having many ecosystem partners on the platform outweigh the disadvantages?||If your partners benefit from having more partners in the platform ecosystem you may be more open, if they feel that too many partners means too much competition, you need to be more closed|
|Do you need the creativity of external partners to innovate the platform?||If yes, you need to be more open. If no, closed is an option|
|Are high investments required to maintain the core platform?||If yes, capital needs to be accumulated which is usually easier when one party is the owner and hence the platform ecosystem may be more closed|
|Are you willing and able to support high governance costs?||Open ecosystems come with high governance costs. If you cannot or will not invest in the required governance, a closed platform is a better option|
|Is platform coherence important?||If yes a more closed ecosystem is required. If coherence is less of an issue, you can be more open|
|Do you have many competence gaps to fill before your platform is commercially attractive?||If no, opt for closed. If yes or if you cannot predict which competencies clients will value: open up|
Rarely all these elements point in the same direction. Choosing the right level of openness requires managerial judgment. Still, running through these questions and discussing them in your team may give you a much more sound basis to choose the right level of openness. I am curious to hear any other variables you think are relevant to make the open/managed/closed trade-off.
Note: For the theoretical background behind the questions in the table I refer to Boudreau (2010, https://bit.ly/3ooEIwH), Gulati, Puranam and Tushman (2012, https://bit.ly/3yjYEp6), and Nambisan and Sawhney (2011, https://bit.ly/33NDSA7).
About this series
In a series of seven blogs I give my view on the ins and outs of managing platform ecosystems. I will discuss the four challenges of managing platform ecosystems, what companies do to overcome the challenges, a model for the governance of platform ecosystems, modelling ecosystems through value maps, how value proposition based ecosystems relate to platform ecosystems and when to opt for a closed or open ecosystem.
All blogs can be found on Blogs – Organizational Revolution