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).
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