AN EVALUATION OF EMERGING HYBRID BUSINESS MODELS: SUCCESSFUL OR FAILED

EMERGING HYBRID BUSINESS MODELS: SUCCESSFUL OR FAILED

When the Microsoft Surface first appeared, many critics panned it as a clumsy move into hardware — a device that was stuck in the middle, a half-step behind the hot market for tablets and only a half-step beyond the dying market for PCs. When the Surface then took off and gave new life to the Microsoft turnaround, it seemed to reinforce the upside-down logic of the company’s digital transformation. However, what few people realized was that Microsoft leveraged an old but often overlooked tool that has remarkable power to manage such transitions.

Over the centuries, firms have used hybrids to manage periods of difficult transition. In a recent article, we defined hybrids as combinations of competing elements or technical generations; for example, the Toyota Prius combines elements of internal combustion engines and electric cars. The advantage of hybrids is that they are a half-step that can help their developers manage long and difficult transitions, such as the one between generations of technology or the transition between careers. The challenge of hybrids is that they are only temporary half-steps, and so in retrospect they can look clumsy. Looking back at history, we can identify hybrids that bridged many of the major technology transitions: hybrid steam/sailing ships, hybrid electric/steam power plants, hybrid typewriter/PCs, hybrid hard/flash drives, hybrid cloud/enterprise computing, and yes, hybrid laptops/tablets in the form of the Microsoft Surface.

A transition of another sort is now emerging and, in turn, demands a hybrid of another sort. In the digital world, platforms such as Amazon, Google, and Nest are king. How can firms create new platforms, or even better, turn their existing products into platforms? As my coauthor, Feng Zhu, and I note in our new HBR article, making that leap from product to platform can be treacherous.

At the core of successful leaps, we have observed a new type of hybrid: the hybrid product/platform business models. Whereas product-based business models create value by selling differentiated products to market niches, platform-based business models create value by facilitating transactions across large, generic markets. Because product-based and platform-based models have many inherent tensions — niche versus mass market targets, asset versus transaction revenue model, differentiation versus network-based competitive advantage, etc. — prior work emphasizes that firms should choose to produce either products or platforms but not blend the two.

However, in our research, we discovered the opposite was true: Firms successfully making the leap from product to platform employed business models combining the two elements. In particular, firms used their product revenues to support the emergence of the platform, slowly letting go of the product mindset as they shifted to a platform mindset.

Some firms combine product and platform business models by using a product-based business model to complement the emergence of a platform business model. For example, Valve Software focused on making video games until it discovered that hackers were illegally modifying those games. Rather than cracking down on the hackers, it hired the hackers, who then developed a second game for Valve. But the growing body of hackers created a second problem — how to facilitate gamers who wanted to play against each other when they might each have a different version of the product.

In response, Valve built a platform called Steam to automatically update its games and make them compatible. Soon Valve realized it could use Steam to distribute any PC game, and having attracted a sizable user base for its own popular games, Valve built what is now the world’s most popular platform for distributing PC games. Valve didn’t quit making or selling its products, the games, but used them to complement the development of its platform, which employs a platform-based business model of taking a cut of revenue from every game sold.

Alternatively, some firms combine product and platform business models by using a product-based business model to subsidize the development of a platform business model. For example, Qihoo, one of China’s most successful internet firms, started out by making a security software product. However, realizing the real opportunity lay in platforms rather than products, Qihoo’s CEO made the then controversial decision to give the product away for free. After amassing a huge user base, Qihoo then leveraged its user base and reputation for security to launch a platform that allowed users to purchase safe software from third-party vendors, taking a cut on every sale. Qihoo didn’t give up on its product but simply used it to subsidize the momentum needed to create a valuable platform.

Adopting a hybrid business model does not mean that a firm will keep that business model forever. Sometimes, after successfully making the leap to platforms, firms may realize they need to abandon their old business model. But usually the greater challenge for leaders is letting go of the product mindset enough to embrace a hybrid business model and seeing that there may be more value in the platform than the product.

Even Steve Jobs struggled with this; he is reported to have been skeptical of Apple’s App Store, preferring to clamp down on the iPhone’s security and void warranties rather than embrace the efforts of hackers to “jailbreak” the iPhone so they could install their own software. Of course, today, Apple still employs a hybrid business model, selling products (iPhones) that complement its platform (App Store).