Cross-Platform Effects: Towards a Measure for Platform Integration Benefit

The advancement of technologies and the ongoing digitization have triggered the development of a large variety of innovations. Media and other information goods have been transformed into bits and bytes and barriers between... [ view full abstract ]

The advancement of technologies and the ongoing digitization have triggered the development of a large variety of innovations. Media and other information goods have been transformed into bits and bytes and barriers between formerly distinct industries burst. Both incumbent and insurgent players jumped on the digitization train and develop completely new business models that are often tailored around over-the-top (OTT), i.e. Internet-based platforms. It has been convincingly postulated that the success of the leading new Internet-based media and communications companies is attributable to exactly this business set-up. Platform companies profit from cross-sided network effects which lead to increased market concentration (winner-takes-it-all dynamic) and high entry barriers (chicken-and-egg effect).

Initially, platform markets consisted of a simple set-up of a handful of platforms. By now, these markets evolved towards an ecosystem of interrelated and layered platforms that have been conceptualized as Platform Networks (PNs). In PNs, platforms operate not only next to each other in direct horizontal competition, but also on top of each other in the value chain. By vertically coupling platforms with one another, platform companies also intertwine the platforms' cross-sided network effects. We refer to this coupling effect as cross-platform effects. As a result, platforms self-accelerate their growth by building close vertical systems in form of Platform Silos (PSs). Still, from both a research and practice point of view, neither the competitive advantage achievable through PS nor its implications have been assessed yet.
In this paper, we aim to make a first step towards closing this gap. Building on prior work on cross-sided network externalities, multi-product pricing and the theory of two-and multi-sided markets, we propose a variance model to capture a user's platform utility (operationalized via intention to use and willingness to pay) for an individual platform and a vertical combination thereof. We conceptualize platform utility as a composite of network value, functional value and value from transaction cost reduction. We conclude by proposing how the model can be used to capture advantageousness of PSs from the perspective of the providers involved.

Finally, we discuss the implications for the sustainability of PNs. We conclude that while the increasing emergence of PSs might lead to the emergence of power houses of innovation in the short term, their strong competitive position might under certain circumstances hamper innovative efforts in the long-term.