The Rules of the Videogame

In today's economy, many markets such as PC operating systems, digital PDAs, videogames and web-based systems, are organized around platforms, which function as interfaces between different groups of users. When platforms are involved, it is commonly assumed that the best course of action for a firm is to "get big fast"; that is, pursue an aggressive strategy to expand the installed user base, perform the lock-in of those users and prevent competitors from doing the same. This is because consumers tend to place a higher value on platforms with a large number of users (network effect). Carmelo Cennamo (Department of Management and Technology) now challenges this commonly-held belief in his most recent article, Platform Competition: Strategic Tradeoffs in Platform Markets, coauthored with Juan Santalo (IE Business School) and forthcoming at Strategic Management Journal. The authors integrate the extant literature on platforms with mainstream competitive strategy to argue that incentive conflicts can arise when multiple "get big fast" strategies are implemented. For a platform, then, combining several such strategies will result in tradeoffs that undermine that platform's ability to capture the whole market.

In the paper, the authors develop their hypotheses in the context of the U.S. video gaming industry. Videogame consoles (such as Playstation or Wii) are platforms on which game titles are developed by independent producers and played by consumers. Strategies that can be adopted by platform owners in the industry include app exclusivity, i.e. denying access to complementary products by a firm's rivals through the formalization of exclusive agreements with application developers, and apps market competition (AMC), which entails promoting competition among applications providers. First, the authors argue that pursuing both strategies at the same time and with the same intensity will have a negative impact on platform performance, as the necessity of expanding the user base through non-exclusive applications conflicts with the incentives provided to developers of exclusive, high-quality apps. Furthermore, the extent to which platforms choose a distinctive positioning with respect to rivals also shapes their outcomes, in that platform performance will decrease at intermediate levels of distinctive positioning and increase at the extremes of the spectrum.

Results support the hypothesized relationships and contribute to the literature on platforms, cautioning firms against the combination of different winner-take-all strategies, as well as the competitive strategy literature by showing that multiple platforms can coexist when their positioning is sufficiently distinct, and that a tradeoff exists between pursuing exclusivity and encouraging competition. Enhancing a platform system's competitiveness thus requires a fundamental and complex balancing act between a platform's incentives to keep attracting users and external apps providers' incentives to provide unique, compelling content.