- 10 Jul 2007
- Working Paper
Executive Summary — Established platform providers can be difficult to displace. This paper explores a path to platform leadership change that does not rely on breakthrough innovation or Schumpeterian creative destruction: a phenomenon the authors call "platform envelopment." In practical terms, envelopment entails one platform provider adding another platform's functionality to its own, and then offering a multiplatform bundle. Eisenmann and his colleagues describe a variety of envelopment attacks based on the relationship between the attacker's platform and its target's, and then discuss the economic and strategic motivations for each attack type. Key concepts include:
- Envelopment is a powerful force shaping platform evolution.
- Well-established incumbents that otherwise are sheltered from entry by standalone rivals, due to strong network effects and high switching costs, may be vulnerable to envelopment.
- A conglomeration attack means that platforms are functionally unrelated but may share common users and components. In such an attack, bundling can yield significant economies of scope. Example: Apple iPhone bundling smart phone with iPod.
- With an intermodal attack, the platforms are weak substitutes, and the attacker may neutralize an emerging competitive threat. Example: Blockbuster bundling DVD-by-mail service with store rentals.
- With a foreclosure attack, the platforms are complements. If envelopment reduces the appeal of a standalone provider's crucial complement, the attacker may strengthen its position vis-à-vis rivals in its core market. Example: Microsoft bundling Media Player with its Windows operating system.
Due to network effects and switching costs, platform providers often become entrenched. To dislodge them, entrants generally must offer revolutionary products. We explore a second path to platform leadership change that does not rely on Schumpeterian creative destruction: platform envelopment. By leveraging common components and shared user relationships, one platform provider can move into another's market, combining its own functionality with the target's in a multi-platform bundle. Dominant firms otherwise sheltered from entry by standalone rivals may be vulnerable to an adjacent platform provider's envelopment attack. We analyze conditions under which envelopment strategies are likely to succeed.