Ecosystems and the Power of Control Points
Profit is made at control points, and the most valuable are operating systems; they are the chokepoint of the value chain in which they operate, and money always flows to chokepoints. Much of the history of technology, particularly in the consumer space, is about owning the operating system ... let's have a look at the most important ones:
Mircosoft Windows
Probably one of the best business models ever. Commoditized hardware vendors competed to make Windows computers faster and cheaper, while software developers simultaneously made those same Windows computers more capable and harder to leave. And, all along, Microsoft collected a licensing fee that was basically pure profit
Of course, Google is not an operating system according to the strict definition of the term. But Google is a platform for attention, and attention is exactly what advertisers crave. Therefore, Google invented a new business model for "operating systems": Advertising. To that end, the business model isn’t so different after all: operating systems are the chokepoint of the value chain in which they operate, and money always flows to the chokepoints. The interplay between developers and users created a virtuous cycle that created Windows lock-in; in the case of Google, the interplay was between users and the data they generated. The operating system of the internet
Google Android & Apple iOS
On mobile Microsoft tried to repeat the trick, only to have its market stolen by Google’s Android, which was not only better than Windows Mobile but also free. Instead of making money with licensing fees, Google decided to exploit and monetize the massive amount of data their users generate. Apple, meanwhile, has always had a different business model: selling hardware. That hardware, though, is differentiated by its own operating system; thanks to the sheer size of the smartphone market this has led to far greater revenue and profits than even Microsoft in its heyday
Facebook (and WeChat in China)
In today's mobile first world, Facebook (and WeChat in China) is probably the most important chokepoint: The average user spends nearly an hour a day on Facebook, Messenger, and Instagram, and the results are predictable: incredible network effects. Though, an application platform is fundamentally incompatible with an advertising-based business model; by extension, an advertising-based business is not necessarily in conflict with the operating system on which it runs. In the case of Google, the company made its fortune on top of Windows; the dominance of iOS and Android made Facebook just an app, which was the best possible thing that could have happened to the company
Amazon Alexa
Amazon is building the operating system of the home. And from the beginning on, Amazon moved quickly to build out its ecosystem in two directions: (1) First, the company created a simple “Skills” framework that allowed smart devices to connect to Alexa and be controlled through a relatively strict verbal framework; in a vacuum it was less elegant than, say, Siri’s attempt to interpret natural language, but it was far simpler to implement. The payoff was already obvious at last year’s CES: Alexa support was everywhere. (2) Secondly, “Alexa” and “Echo” have different names because they are different products: Alexa is the voice assistant and much like AWS. Echo is Alexa’s first customer, but hardly its only one.
Get more insights into digital ecosystems, control points and operating systems:
Gartner - Digital Business Ecosystems & The Platform Economy
HBR - Three Elements of a Successful Platform Strategy
MIT Sloan - Platform Strategy Explained
Stratechery - Alexa: Amazons Operating System
Stratechery - Google and the limits of strategy
Recode - Google is trying its hardest to keep Alexa from ‘winning’ CES