On Platform Ecosystems- A Coming Explosion of the Facebook Ecosystem?

Entrepreneurs have been creating companies and venture capitalists have been investing in ecosystem’s surrounding software and Internet platforms for years. Living within a large platform ecosystem is not a bad business growth strategy. A number of large technology companies got their start in the IBM ecosystem, came other platforms with ecosystems including Unix, Oracle, Microsoft, Linux, Google, Salesforce.com, Apple, VMWare and many others.

The ecosystem surrounding a platform company both lives off of and enhances the health of a technology platform company in true symbiotic fashion. Generally, the stronger the platform company the stronger the ecosystem and the stronger the ecosystem the stronger the platform company.

As a common theme, once a company becomes close to being a platform company, the company must have a strategy to build a thriving ecosystem surrounding your company. As an example, one of the brilliant moves that Salesforce.com made was setting up their app exchange, as it really helped to cement them as the platform in the sales force automation sector originally. My sense is that they innovated off of the Microsoft playbook, as Microsoft has done an exceptional job of developing and maintaining its ecosystem and in a lot of ways set the standard.

As a more recent example, Google has hired some of the Microsoft ecosystem team and combined them with others and I suspect Google is working hard on bringing its ecosystem to the next level. Perhaps this is at least a business growth strategy against Apple, who seems less inclined to build a strong ecosystem which, perhaps, makes them vulnerable to this attack.

As a side note, the idea of building a thriving ecosystem is difficult for many people inside a platform company, as they look at the situation as a zero sum game. What the ecosystem gets, they don’t get. Also, there is a lot of internal consternation around ecosystem strategies even for managers who “get it” as ecosystem participants are also sometimes competitors and it is easier to live in a “good guy, bad guy” world than in the messy world of ecosystems. I believe that this is why there are a range of expressions of ecosystem strategy in the platform companies. I also suspect that the use and management of ecosystems will continue to pick up going forward, however, as the world gets more open every day.

I read somewhere that the largest company size in an ecosystem of a platform company is around 10% of the size of that platform company. I am not sure if this was statistically proven, but it is logical that if your target market is 100% of a company’s customers and you get 10% of those customers, then your size is around 10%, if average selling price (ASP) or revenue per user (RPU) are about the same. Also, if a company in an ecosystem gets too large or is projected to be large and/or important, it makes sense for the product to get absorbed into the ecosystem one way or another (such as what happened during the browser wars of the 90s when Netscape was essentially put out of business when Microsoft offered their competing product for free).

Of course, there are plenty of platform ecosystems with companies in them that do not reach the 10% mark. In my view, this happens when the platform company executes an ecosystem strategy that limits the size of its ecosystem (like it appears that Apple is doing). It has some benefits, as the platform company can maneuver more easily without having to communicate and coordinate with a large number of partners (perhaps the reason for Apples string of great products?), but it could also serve to minimize the defensibility of the platform to an attack by other platforms.

The size of a platform company and the company’s stance toward its ecosystem is important from the perspective of entrepreneurs and venture capitalists making human and capital investments in its ecosystem. Venture capitalists want to invest in companies with differentiated business growth strategies in large markets and the larger and more open the platform company, the more entrepreneurs and venture capitalist flock to its side and help to create its ecosystem. Clearly, the more entrepreneurs and venture capital financing to a company’s ecosystem, the stronger the ecosystem. And, the stronger the ecosystem, the stronger the platform.

Essentially, once a platform company gets to a critical size (or is projected to get to a critical size) and appears open to the ecosystem development, entrepreneurs and venture capitalists rush to participate in the ecosystem and a very strong defensible competitive advantage kicks in for the platform company. (another reinforcing effect in the growth stage of this cycle is that everyone else wants to work at the hot platform company. This is not a long term competitive advantage but is a great short-term competitive advantage, as when the growth slows the employees want to move to the next hot company. The ecosystem, however, stays in place and continues to protect and enhance the platform).

With this as a backdrop, look at the chart below courtesy of Silicon Alley Insider.
While the ecosystem has already started, and many companies are growing nicely, such as Zynga, would you say that there is a coming explosion of the Facebook Ecosystem? Is it game over with Facebook the winner in the social networking platform sector? This chart is very impressive to me…

Note1: One of the types of companies that I like investing in are companies that participate in multiple platform ecosystems. This both helps to increase the size of the target market and can helps to allow the ecosystem company to have an advantage over the platform company. A great example of this is in the systems management software markets, back-up and recovery markets, and disaster recovery markets where the companies can produce products for multiple platforms and where the heterogeneity of platforms helps to defend against an attack by any individual platform vendor.

Note2: There are plenty of partners of Apple that are large, but the business but the point is that the business that they do because they are an Apple partner is not 10% of the business of Apple.

Note3: I do recognize that Linux is not a platform company, but rather an open source operating system. There is an ecosystem around it, however, that acts very similarly to the ecosystem surrounding a technology platform, although a lot of people and companies in the Linux ecosystem would argue that their ecosystem is healthier due to the nature of Linux.