Don’t fall into the “IBM” trap!

You do not want to fall into the trap that IBM fell in when it created an ecosystem for the development and sales of its IBM PC. We tell the whole story in the book but suffice it here to say that the ecosystem included Microsoft and Intel, who both made a handsome profit from the IBM PC, while IBM as ecosystem leader lost its shirt.

In chapter 8 Arnoud and Peter explain how and where you can draw a growing stream of profits from your ecosystem and how to profit from an ecosystem in a sustainable way, nurturing your monetization engine rather than choking it, so that profits keep flowing. They have three proposals. Here is an extract from chapter 8:

A vision of the unique value of the ecosystem

“One, the ecosystem must be able to create offerings that deliver more value to the end user than any company can single-handedly provide. If the ecosystem cannot deliver additional value at a price that customers are willing to pay, there will not be any surplus to share. Ecosystems must create and grow the proverbial pie before carving it up. Therefore, you need a vision of the unique value the ecosystem can create, and a strategy to realize this vision, with the help of partners. […]

Keystone

Two, to extract profits from your ecosystem, you need to find what Iansiti and Levin in their early, influential book on ecosystems called a “keystone.” This is some element of, or activity in, the ecosystem’s value creation system that you can own and control, on which the ecosystem’s ability to create value for customers is dependent. Without that element, the ecosystem cannot satisfy its customers—just as a dome would collapse without its keystone. ¹ The keystone ensures the ecosystem will continue to need you. Part of the reason for IBM’s inability to sustainably monetize the PC-compatible ecosystem was its lack of such a keystone. While IBM provided many elements that helped the ecosystem to thrive, including the overall architecture and the specifications for many of the interfaces between components, it lacked a proprietary component that other participants would need to buy in order to serve their own customers.

To provide a sustainable flow of profits, the keystone needs to satisfy certain conditions. These are the same four conditions strategy theorist Jay Barney concluded that a resource must satisfy before it can underpin a sustainable competitive advantage: it must be valuable, rare, non-substitutable, and hard to imitate. ² Only then can you use the keystone to extract profit reliably. […]

Tollgates

Three, you need to set up tollgates through which you can collect a share of the customer value that the ecosystem creates. To be profitable as an ecosystem leader, you need to create a mechanism that will allow you to charge for the keystone you contribute to the ecosystem. That mechanism—think of it as the design of a tollgate—may take the form of license fees, royalties, commissions on transactions that take place in the ecosystem, or a share of the profits on sales of products or services the ecosystem partners supply. The tolls need to be efficiently collected. Participants should hardly notice they are paying them. This will reduce the likelihood of them trying to bypass the tollgates.

Typical tollgates would include a mix of license fees, royalties and transaction fees, sales of value-adding services, and leveraging data and knowledge produced in the ecosystem? “

In the book you will find the key advantages and disadvantages of each of these ways to charge money.

¹ M. Iansiti and R. Levin, The Keystone Advantage: What the New Dynamics of Business Ecosystems Mean for Strategy, Innovation, and Sustainability (Boston: Harvard Business School Press, 2004).

² Jay Barney, “Firm Resources and Sustained Competitive Advantage,” Journal of Business 17, no. 1 (1991): 99‒120.