Disruption in Platform‐Based Ecosystems

• Author: Hakan Ozalp,Carmelo Cennamo,Annabelle Gawer
• Date: 01 November 2018
• Published date: 01 November 2018
• DOI: http://doi.org/10.1111/joms.12351

© 2018 John Wiley & Sons Ltd and S ociety for the Advancement of Ma nagement Studies

Disruption in Platform-Based Ecosystems

Hakan Ozalp, Carmelo Cennamo and Annabelle Gawer

University of Leeds;Bocconi University;University of Surrey

abstract We study intergenerationa l platform-technology transit ions as instance s of

potentially d isruptive innovation at the ecosystem level. E xamining the launch of 12 platform

technologies in the U.S . videogame industry covering t hree console generations from 1993

until 2010, we show that incumbents int roducing next-generation platform technologies w ith

advanced capabil ities increase t he challenges of developing complements for the platform

technology, steepening complementors’ lear ning curves and disrupt ing the very same

complementors that platform owners need to t hrive in the next-generation competition. We

find th at, because of these str uggles, platforms with advanced c apabilities but high

complement-development challenges show a pattern of defect ion of complementors toward

rival, less cha llenging platforms. Our st udy extends mainstream dis ruptive-innovation theory

to the context of platform-base d ecosystems by offering a systemic v iew that accounts for

disaf fection on the part of tech nology complementors—rather t han end users—as the main

reason for dis ruption.

Keywo rds: disr uption, ecosystem, innov ation, platform, tech nological t ransition

INTRODUCTION

The theory of disruptive innovation (Christensen, 1997; Christensen and Raynor,

2003) is considered one of the most influential theories of how firms and indus-

tries respond to technological change, and is highly popular among practitioners

(The Economist, 2011).1 In recent business journalism, the vocabulary of disrup-

tion has been relentlessly applied to highly visible technological firms such as

Google, Amazon, Uber, and Airbnb, all deemed “disruptors” of existing indus-

tries. These firms all base their business operations upon their core, proprietary

technological platforms (Gawer, 2014). They also rely on vibrant ecosystems of in-

dependent complementors to supply complementary products and services that

Journal of Manageme nt Studies 55:7 November 2018

doi: 10.1111/jom s.12351

Address for reprints: Hakan Oza lp, VU University A msterdam, 1081 HV A msterdam, Netherla nds

(h. oza lp @v u. nl).

1204 H. Ozalp et al.

© 2018 John Wiley & Sons Ltd and S ociety for the Advancement of Ma nagement Studies

enhance the value of their core technological platform (Gawer and Cusumano,

2002; Parker et al., 2016). Because of these so-called “multi-sided platform dynam-

ics” (Evans, 2003; Rochet and Tirole, 2003), fueled by reinforcing network effects

(Farrell and Klemperer, 2007; Katz and Shapiro, 1994),2 platform ecosystems ex-

hibit a specific structure of economic relationships among interdependent firms

(Adner, 2017; Jacobides et al., 2018) and depart from the traditional contexts in

which disruptive-innovation theory was originally developed. Despite the hype in

the business press, we have limited knowledge about how disruption unfolds in

such contexts (but see Ansari et al., 2016).

Whether in videogames, smartphones, or enterprise IT systems, platforms are

embedded in highly innovative ecosystems and evolve through intergenerational

technological transitions, whereby the next generation of platform technology

can offer greater benefits to users to the extent that they can enjoy better comple-

ments (Cennamo, 2016; Claussen et al., 2015). For instance, a videogame console

transitioning from 2D to 3D graphics capability can offer users a more immersive

gaming experience by depicting more realistic game-worlds, and can also benefit

complementors by providing them with a new technology for developing better

games that are potentially more appealing to users (de Vaan, 2014). However,

those benefits (and the value of the next-gen platform) are conditional on the

provision of complements that use the new technological capabilities of the next-

gen platform (Cennamo, 2016).

Incumbent platform owners face an inherent tension during these generational

transitions (Reimer, 2005). They might want to advance their next-gen platform

to the technological frontier to stay ahead of the competition and impress users.

Yet, since complementors would also need to migrate to the next-gen platform

to create significant value for users (Ansari and Garud, 2009), incumbents can

fail to create value unless they secure continued support from complementors

to produce the next-gen complements that users expect from the technology

(Cennamo, 2016). Thus, a successful transition to the next-gen platform is not

guaranteed. The introduction of next-gen platform technologies may create

technological discontinuity with the previous generation and open a window of

opportunity for competitors (e.g., Cennamo, 2016). This can occur because dis-

ruptive tensions might emerge on the complementors’ (supply) side when they

need to migrate to next-gen platform technologies (e.g., Ansari and Garud, 2009;

Ansari et al., 2016). This paper aims to shed light on these issues by addressing

an important but under-studied set of questions: How do generational technological

transitions affect disruption in platform ecosystems? And how do incumbent platforms nav-

igate the process of disruption?

Existing related work in various streams of literature, summarized in Table I,

has focused on different aspects to explain why some technologies can disrupt in-

cumbents or fail to be adopted in the market. However, they tend to focus on the

technology characteristics and value for end users, and neglect to examine the

broader interdependencies in the ecosystem of complement providers. Drawing

on the idea advanced in Ansari et al. (2016) that, while disrupting incumbents’

Disruption in Platform-Based Ecosystems 120 5

© 2018 John Wiley & Sons Ltd and S ociety for the Advancement of Ma nagement Studies

technology, next-gen technologies might also disrupt the providers of comple-

mentary products that they vitally need for the new technology to succeed in the

market, we consider these intergenerational technological transitions as instances

of potentially disruptive innovations at the ecosystem level. Though next-gen plat-

forms may well consist of innovations generated along the same technological

trajectory as the previous generation, they may not be sustaining innovations for

incumbents to the extent that they remove the backward compatibility of the

next-generation platform (and can thus destroy the value of the last-gen plat-

form’s installed base), and to the extent that they break established linkages with

their complementors. Choices that incumbents make in bringing about new tech-

nologies may well therefore render a significant portion of incumbents’ assets

obsolete and loosen their ecosystem linkages, hampering their relationships with

end users and complementors.

We explore these issues in the context of intergenerational technological tran-

sitions in the videogame industry in the United States. The videogame industry

has been often characterized as a multi-sided platform ecosystem (e.g., Cennamo

and Santaló, 2013; Zhu and Iansiti, 2012), with the console being the platform,

one side consisting of the population of game developers and the other side

being the population of console owners. This industry provides a particularly fa-

vorable setting to explore how disruptive innovation unfolds in ecosystems, as

every few years it undergoes a series of technological intergenerational transitions

wherein at each transition multiple console makers launch new generations of

their console (platform) technologies that take performance to an entirely new

level. We conducted an in-depth qualitative and quantitative descriptive analysis

of the launch of 12 next-gen platform technologies, covering three generations

from 1993 until 2010.

We observe a consistent path across these intergenerational transitions. First,

we identify a trade-off: we find that incumbents’ next-gen platforms with greatest

technological capabilities increase development difficulty for complementors3

and, thus, are less likely to obtain timely and high-quality complements in the

early phases of the intergenerational transition. We suggest that this is because

developers find it more challenging to support these platforms compared to rival,

less challenging platforms in the generation. This occurs despite complemen-

tors having preferential linkages with incumbent platforms. Second, we show a

pattern of developers defecting during these intergenerational transitions from

these more advanced platforms to rival, less challenging platforms. Third, we show

that platform firms, aware of these risks and drawbacks, use different actions to

manage this trade-off, including the internal development of complements and

sharing of complement development knowledge with independent developers to

ease the development challenges on the platform.

Our study contributes to the systemic view of disruptive innovation (Afuah, 2000;

Ansari et al., 2016) by highlighting a paradox: specifically, to survive and grow,

incumbent platform firms that cannot deter rivals or new entrants from intro-

ducing innovative next-generation technologies that may disrupt their ecosystem