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Software, Ecosystems and the New Logic of Competition

As digital ecosystems comprise a greater share of economic activity, business leaders must actively unlearn the traditional rules of competition and internalize the new ones.

Amazon Web Services (AWS) and several open source technology companies are engaged in a war of words over how the practice of commercializing open source software originated by customers and partners impacts open source companies.

Zooming out from the specifics of this particular episode, it is instructive in illustrating a few important principles behind the emerging game of ecosystem competition. For companies accustomed to traditional competitive dynamics in industries with linear value chains, these principles may seem counter-intuitive, but they will become increasingly important as ecosystems become integral to the new logic of competition.

1. The roles companies play in ecosystems are multifaceted — they can be customers, competitors or partners at various times or simultaneously — unlike the static roles of traditional value chains.

In our Amazon example, the open source tech companies in some cases are AWS customers — they pay AWS to use its cloud computing platform. Simultaneously, MongoDB, one of the open source companies in the dispute, is also an AWS partner that sells the commercial versions of their open source software through AWS’ software marketplace. For these open source companies, AWS acts as their competitor when it releases its own commercial versions of the open source code that these companies are also commercializing. To make matters more complex, some of AWS’ customers are also customers of MongoDB and Elastic. The net effect of this complex, dynamic web of relationships is that AWS both supports its customers and partners but also, in some cases, competes with them. As in a natural ecosystem, relationships can be simultaneously competitive and collaborative, clouding distinctions that are usually much clearer in traditional value chains.

2. Ecosystem orchestrators must constantly decide what value to capture themselves vs. share with ecosystem participants.

Unlike a traditional value chain in which the game is to maximize value capture, ecosystem orchestrators, such as AWS, must constantly decide what value to capture themselves versus what to share with customers and partners. In ecosystems, both the orchestrator and ecosystem participants (acting as customers, partners, and competitors) can have direct relationships with the end customer because participants often complement the orchestrator’s own solution. AWS is more valuable as a cloud computing platform if customers can also buy software directly from its AWS marketplace.

AWS’ position against the allegations of unfair competition from the open source tech companies is clear, stating, “If you look at the history of AWS, we deliver what our customers ask us to build. There are times when there is some degree of overlap with what our customers offer, but most of these market segments are quite large and support several successful entries.” AWS is effectively stating that competition and collaboration go hand in hand in successful ecosystems.

While orchestrators of mobile ecosystems such as Apple and Google have chosen to selectively deliver a few core mobile apps themselves — email, maps, an alarm clock, etc — they have largely let their developer community (their partners) build the rest. Developers made $34 billion in revenue from selling apps via Apple’s app store in 2018. In addition, developers are free to release competing versions of the core apps into each ecosystem. In effect, Apple and Google have decided to enable their partners to compete with them for the greater health of their respective ecosystems. The greater the value developers can capture, the more it incentivizes further innovation in the mobile ecosystem.

Ecosystem orchestrators like Amazon must effectively balance the attractiveness of the platform to partners, with its attractiveness to end users, with its own economics. If it competes too much with its partners, then it risks triggering defections — indeed, some retail customers have decided to join Microsoft’s rival cloud platform, because they fear competition from Amazon’s retail business. If it cedes too much value to partners then it risks becoming one of the many ecosystems which fail to achieve sustainable viability. Meanwhile, Apple and Netflix both compete with Amazon (in smart home and streaming video, respectively) but both are large public customers of Amazon Web Services (AWS). Clearly, Apple and Netflix take a nuanced, not one-dimensional, view of Amazon. There is no simple rule for or against competing with your customers and partners in digital ecosystems. The only rule is to carefully and continually manage this balance.

3. As a result, ecosystem competition occurs on two levels: within an ecosystem to apportion value pools between the orchestrator and participants, and between rival ecosystems.

The trade-off between value capture versus value sharing directly influences how attractive it is for participants to remain in an ecosystem. If participants feel unfairly treated, rival ecosystems may seek to recruit them. For example, AWS competitors — Microsoft and Google — have pursued a strategy of differentiation: both publicly positioned themselves as open source friendly partners and have pledged to refrain from competing against their customers as they position themselves against the cloud computing leader, AWS. In the mobile world, Google has mimicked Apple’s app store fee structure in order to ensure developers have an equivalent incentive to release apps into Google’s mobile ecosystem. Most critically, these examples illustrate how a change in the internal competitive logic within an ecosystem affects the external competitive dynamics with rival ecosystems. As ecosystems become the norm rather than the exception, and as the business scope of the tech giants begins to inevitably overlap, such inter-ecosystem competitive considerations will rise to the fore.

4. Ecosystems are managed in public, not in private; the ecosystem brand is the reality.

Orchestrators of large ecosystems, in some cases with hundreds or thousands of partners, typically have explicit public policies governing value sharing. Most of what goes on in ecosystems occurs beyond the corporate boundary of the orchestrator and is visible to all. Apple and Google both take a fixed fee from app store sales. AWS’ position on competing with open source tech companies is the same as its position on competing with retailers — the market is big enough for all of us. The entire ecosystem benefits when the orchestrator articulates a clear set of governance principles and value sharing rules. These in effect become the ecosystem’s internal rules of competition, helping ecosystem participants know how the orchestrator will collaborate and compete.

As digital ecosystems comprise a greater share of economic activity, business leaders must actively unlearn the traditional rules of competition and internalize the new ones, like those illustrated by this episode.

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