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Software Platform Dynamics
Platforms Defined A platform is defined to be a relevant and ubiquitous common service abstraction. A platform's raison d'être is to create value by generating significant leverage for a variety of constituencies. Software platforms, for example, create leverage for many parties such as hardware developers, software developers, content developers, purchasers, administrators, and users. These parties are collectively referred to as the platform's "ecosystem". The corollary is that platforms do not sustain growth if they do not sustainably create significant unique, relevant and leveragable value for the ecosystem. Software platforms have the potential to create increasing returns as a function of ubiquity, and thus tend to exhibit natural geometric growth patterns until they reach the point of practical market saturation, at which point their growth pattern becomes at best highly correlated with the overall market. The more that the platform's leverage directly and positively impacts the platform's ultimate end-user (e.g. the more "visible" it is), the more rapid the geometric growth pattern will be. The same is true of other levels of the value chain, e.g. demand at outer levels of the value chain accelerates growth far more than "embedded" platforms whose demand at inner levels may be suppressed by the time it gets to outer levels. For any platform to attract a sustainable ecosystem, it is required that the entity building the platform additionally and directly invest in building nontrivial "layered offerings" on that platform, in order to gain experience with the costs would be to ecosystem partners, and in order to ensure that the platform's capabilities are complete enough to provide actual value to the ecosystem partners. This is later guaranteed to catalyze ecosystem conflict, but it is a necessary cost of driving a successful platform. Pricing & Profitability In the early days, the platform vendor must use creative partnership and marketing techniques to bootstrap the ecosystem, focused on leverage and ex post facto upsell. For software platforms, this generally means creating zero-cost packages for both end-users and developers/integrators with hard-wired or contractual constraints that effectively preserve upsell potential. Finding the "right" price point for a software platform is critical. It must be low enough so as to not disincent someone in the ecosystem from creating a dependency in their own offering, it must be low enough so as to discourage someone from making the investment necessary to create an alternative disruptive platform, and it must be high enough both 1) to maintain a perception of value in the platform, and 2) to create significant margins well before ubiquity is assured so that the ecosystem is assured of the platform's ultimate viability. Software development is largely fixed-cost. The variable-costs associated with software generally pertain to marketing, sales, distribution. Although, for non-platform software, variable costs are largely borne by the publisher of that software, for platform software the variable costs are commonly and willingly spread across the platform's ecosystem because it's in the ecosystem's collective best interests for the platform to be adopted. Furthermore, variable costs are inherently lower for platform software as "collective need" decreases marketing and sales expense: leverage creation means that platforms are largely "bought", not "sold". For both of these reasons, profit margins on platform software are inherently higher than for non-platform software. Investment It is rare to find a platform whose value is readily apparent until and unless applications are available that demonstrate the platform's unique capabilities, and thus, in order to avoid a prolonged "chicken and egg" situation, new platforms must be financed either by 1) applications created for that platform by the platform vendor, or 2) unrelated and very patient sources. Platforms in the absence of applications cannot be expected to be self-financing until they are well on the road to ubiquity, regardless of theoretical margins. Conversely, platforms with applications become self-financing only as a direct function of the application's own profitability. Platforms require an "invest until it hurts, and continue doing so" state of mind, until such time as the platform reaches practical ubiquity. Investment creates a significant barrier to entry, and every dollar invested is a dollar leveraged many times over by the ecosystem and, if properly managed, by self. In a constrained investment environment, during a platform's growth toward ubiquity, the best use of investment dollars is in taking focused actions (either product or market-facing) to ensure the platform's progress toward sustained geometric growth. This is particularly critical during the early growth phases, as "chicken and egg" issues resolve during creation of the ecosystem surrounding the platform. In an investment environment with fewer constraints, the best way to ensure long-term wealth creation is to place significant leveraged bets on the platform itself, through investments in offerings that generate demand for the platform, and optimally for "layered platforms" that create their own geometric growth curves on top of the platform's own geometric growth curve. No investor will be able to place a purer or more committed bet on a platform than the platform vendor itself, and thus is naturally destined to achieve higher rates of return for a successful platform. As a platform nears or achieves practical ubiquity, and thus as the end of geometric growth is within sight, the most effective use of new investment is not to continue to enhance that platform, but to instead invest in either 1) new "layered platforms", or 2) new disruptive "alternative platforms". It is key that as a platform achieves practical ubiquity, its profitability curve transforms from its own toward instead being a direct function of the market, and thus increased investment in the platform post-saturation is purely defensive: it only works to continue to ensure that it continues to follow that market's own growth rate.
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