Why Facebook's Imitators Failed"article:

12.What is meant by the term "creative destruction"? Explain the creative destruction this book review article is talking about in the innovations of Apple, Google and/or Facebook.

Article: The best digital businesses are platformstechnology-enabled networks that connect consumers and producers and, some of the time, advertisers. The mega-success of platforms like Facebook and Google, not to mention Apple and Amazon, has led to a misconception that this business model inevitably gives rise to the unshakable hegemony of one or two big winners. In truth, platforms are not free from the unruly brawl of competition. Three new books examine the means by which digital companies try to keep their platform adversaries at bayand sometimes succeed. For traditional businesses, economies of scale are the key to competitive advantage: Larger firms have lower average costs. In the digital economy, network effects matter most. In "Matchmakers" (Harvard Business Review, 260 pages, $35), David S. Evans (a consultant) and Richard Schmalensee (a professor of management) highlight two particular forms. Direct network effects occur when additional users make a service more valuable for everyone. If one's colleagues are all on, say, LinkedIn, it will be hard for another professional network to exert a strong appeal. Without the critical mass of LinkedIn, the alternative will have less utility even if its features are better. Indirect network effects arise from positive feedback loops between opposing sides of a market. The value of Rightmove, for instance, the leading online real-estate site in Britain, comes from a matching function: Since each home is unique, buyers prefer the site with the most properties, and real-estate agents favor the site with the most buyers. This virtuous cycle magnifies Rightmove's advantage even though participants on each side of the market compete with one another: More buyers increase competition for the same homes, and agents compete for buyers. This copy is for your personal, non-commercial use only. To order presentation-ready copies for distribution to your colleagues, clients or customers visit http://www.djreprints.com. http://www.wsj.com/articles/why-facebooks-imitators-failed-1463610874 ARTS BOOKS BOOKSHELF Why Facebook's Imitators Failed If one's coworkers are all on the same platform, any alternative will have less utilityeven if its features are better. | | May 18, 2016 6:34 p.m. ET By JEREMY G. PHILIPS Why Facebook's Imitators Failed - WSJ Page 1 of 7 http://www.wsj.com/articles/why-facebooks-imitators-failed-1463610874 8/29/2016 In "Modern Monopolies" (S t. Martin's, 266 pages, $27.99), Alex Moazed and Nicholas L. Johnson, mobile developers and consultants, argue that "one or two platforms will dominate an industry as a market matures," creating natural monopolies or duopolies. In reality, though, these are rare and depend on a favorable market structure, like the one that exists for smartphones. PHOTO: WSJ PLATFORM REVOLUTION By Geoffrey G. Parker, Marshall W. Van Alstyne & Sangeet Paul Choudary Norton, 336 pages, $27.95 MODERN MONOPOLIES By Alex Moazed & Nicholas L. Johnson St. Martin's, 266 pages, $27.99 MATCHMAKERS By David S. Evans & Richard Schmalensee Harvard Business Review, 260 pages, $35 Why Facebook's Imitators Failed - WSJ Page 2 of 7 http://www.wsj.com/articles/why-facebooks-imitators-failed-1463610874 8/29/2016 Buying an iPhone locks one into Apple's iOS platform, and the costs of switching to Google's Android is highnot only the price of a new phone but the loss of interlinked Apple software platforms. So Android and iOS split the market: Android's share of devices is more than 80%, but Apple makes most of the profits. Given that the only path to iPhone users is via the App store, Apple is able to collect monopoly-like rents. Since the two platforms are each large and growing, developers make apps for both. The competing ecosystems both thrive. Still, the dominance of one or two big players is not inevitable. Apple Pay, for example, is an appealing platform, and it has positive feedback loops: More users attract more merchants and vice versa. But consumers carry multiple payment methodscredit cards and cash as well as smartphonesand merchants accept alternative payment methods. So participants on both sides of the platformbuyers and sellersswitch between Apple Pay and its competitors. This dynamic prevents any one player from dominating. In "Platform Revolution" (Norton, 336 pages, $27.95), the authorsGeoffrey G. Parker and Marshall W. Van Alstyne (professors of engineering and information economics, respectively) and consultant Sangeet Paul Choudarypoint out that "platform businesses rarely charge all their users." Making everyone pay, the authors observe, usually discourages usage and undermines network effects. Instead, one side of a platform typically subsidizes another. Job sites, for instance, are offered up free to consumers to maximize the potential audience, which in turn can be sold to advertisers and recruiters. But the subsidy model works in only limited spheres. At The Wall Street Journal and some other major news outlets, online consumers and advertisers both have to pay. Free accessalthough the predominant online modelcannot generate enough incremental advertising dollars to cover lost subscription revenue. In a novel twist, some startups subsidize all sides of their platforms. The aim is to capture as many users as possible, achieve strong network effects and find a quick path to market dominanceat which point the subsidies recede and profits flow, or so it is hoped. Microsoft built a console gaming business by subsidizing the entire ecosystem at the outsetselling Xbox consoles to consumers below cost and paying developers to make exclusive games. Eventually the company was able to recoup its investment and make money from software royalties and subscriptions. More often, pervasive subsidy provides only a short-term hit: Offering a free lunch will fill all a restaurant's tables but won't stop folks eating across the road the next time around. Why Facebook's Imitators Failed - WSJ Page 3 of 7 http://www.wsj.com/articles/why-facebooks-imitators-failed-1463610874 8/29/2016 As the authors of "Matchmakers" observe, "winner take most" outcomes are rare; and even when they are achieved, their success is "likely to be more transient than economists and pundits once thought." While it may be hard to compete with WhatsAppthe popular instant-messaging serviceit's much easier to get a rival going than it would have been to wire up millions of homes and compete for landline telephone service a couple of generations ago. The three books mostly cover the same ground, often using the same examples and even similar phrasing. The authors are all excited about the future of platforms without being panglossian. "Platform Revolution" is thorough and often provocative, though the authors sometimes gild the lily, contending that "flexibility provides the crucial competitive edge" because "competition is perpetual motion." The authors of "Modern Monopolies" credentialize themselves early on, saying that they "understand platforms better than anyone else." Beyond basic theory, they set out to explain "why everything you think you know about the twentieth century is wrong." (Spoiler: It's not.) "Matchmakers" is the most measured and analytical of the three books. The authors fairly conclude that, while the telegraph was "a far more important multisided platform" than anything produced so far by the Internet, platforms are "behind the gales of creative destruction that . . . will sweep industries for decades to come." Mr. Philips is a general partner at Spark Capital and an adjunct professor at Columbia Business School. HEALTH & WELLNESS What To Read Next... Why Facebook's Imitators Failed - WSJ Page 4 of 7 http://www.wsj.com/articles/why-facebooks-imitators-failed-1463610874 8/29/2016 Eating Fruit While Pregnant May Boost Your Baby's Intelligence ACHES & CLAIMS Can a Sulfur Compound Speed Recovery After Exercise? PRIVATE PROPERTIES Mucinex's John Q. Adams Sr. Seeks $16 Million for Colorado Property Why Facebook's Imitators Failed - WSJ Page 5 of 7 http://www.wsj.com/articles/why-facebooks-imitators-failed-1463610874 8/29/2016 ASIA NEWS Singapore Reports More Than 40 Local Zika Transmissions FINANCIAL REGULATION China Sets Ceilings on Credit Issued Via P2P Platforms CAPITAL JOURNAL In Clinton vs. Trump, Who Is Inspired to Vote? Why Facebook's Imitators Failed - WSJ Page 6 of 7 http://www.wsj.com/articles/why-facebooks-imitators-failed-1463610874 8/29/2016 Copyright 2014 Dow Jones & Company, Inc. All Rights Reserved This copy is for your personal, non-commercial use only. Distribution and use of this material are governed by our Subscriber Agreement and by copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit www.djreprints.com. Why Facebook's Imitators Failed - WSJ Page 7 of 7 http://www.wsj.com/articles/why-facebooks-imitators-failed-1463610874 8/29/2016