Threat of platform‐owner entry and complementor responses: Evidence from the mobile app market

• Published date: 01 September 2019
• Date: 01 September 2019
• Author: Wen Wen,Feng Zhu
• DOI: http://doi.org/10.1002/smj.3031

RESEARCH ARTICLE

Threat of platform-owner entry and complementor

responses: Evidence from the mobile app market

Wen Wen

1

| Feng Zhu

2

1

McCombs School of Business, University

of Texas at Austin, Austin, Texas

2

Harvard Business School, Harvard

University, Boston, Massachusetts

Correspondence

Feng Zhu, Harvard Business School,

Harvard University, Boston, MA 02163.

Email: fzhu@hbs.edu

Funding information

Harvard Business School; the NET institute

Abstract

Research Summary:This paper studies the impact of

platform-owner entry threat on complementors in

platform-based markets. We examine how app developers

on the Android mobile platform adjust innovation efforts

(rate and direction) and value-capture strategies in

response to the threat of Google's entry into their markets.

We find that after Google's entry threat increases, affected

developers reduce innovation and raise the prices for the

affected apps. However, their incentives to innovate are

not completely suppressed; rather, they shift innovation to

unaffected and new apps. Given that many apps already

offer similar features, Google's entry threat may thus

reduce wasteful development efforts. We discuss the

implications of these results for platform owners, com-

plementors, and policy makers.

Managerial Summary:We examine one prevalent source

of conflict: platform owners' entry into complementary

product spaces. We show that app developers on Google's

Android system are strategic and nimble actors. They

respond to the threat of Google's entry by adjusting both

value-creation and value-capture strategies. We also show

that platform owners could use direct entry to shape inno-

vation directions and encourage variety of complements.

Overall, on the one hand, Google's entry may have pushed

complementors into other areas (which might be less

lucrative) and strengthened its position in the mobile mar-

ket. On the other hand, the entry may have reduced waste-

ful production efforts in the development of redundant

Received: 17 June 2018 Revised: 3 March 2019 Accepted: 16 March 2019 Published on: 23 April 2019

DOI: 10.1002/smj.3031

1336 © 2019 John Wiley & Sons, Ltd. wileyonlinelibrary.com/journal/smj Strat Mgmt J. 2019;40:1336–1367.

applications. The overall welfare implication is thus

ambiguous.

KEYWORDS

complementors, entry threat, innovation, mobile app industry,

platform-owner entry

1|INTRODUCTION

Platforms are becoming increasingly influential in our economy. On these platforms, a wide range of

small firms, often referred to as complementors, leverage platform resources to offer complementary

products or services to prospective end users. Although these complementors are value-creation part-

ners of platform owners (e.g., Kapoor, 2013), many of them are concerned that platform owners may

imitate them and enter their product spaces with similar offerings. For example, with every major

update of Apple's iOS operating system (OS), Apple uses its own offerings to compete with many

third-party app developers. When Amazon sources its successful products directly from suppliers,

many third-party sellers complain that it is competing against them.

Unlike the traditional R&D collaboration settings in which firms do not solely rely on partners for

value creation, most complementors in platform-based markets have to form ties with platform

owners to create value and often have a limited number of platforms to choose from. Meanwhile,

because large platform owners can favor their own offerings through bundling or prominent displays,

their entry into a product space could significantly affect complementors' ability to create and capture

value (e.g., Bakos & Brynjolfsson, 2000; Farrell & Katz, 2000; Parker & Van Alstyne, 2017; Zhu &

Liu, 2018). As a result, platform owners' use of their market power with respect to other firms in their

ecosystems has become a hotbed of policy debate. One example is the recent investigation of Ama-

zon by the European Union regarding whether it unfairly uses the data of third-party complementors

on its platform to decide which markets to enter.

1

Despite the policy and managerial implications of the tension between platform owners and com-

plementors, the related literature is still nascent, with only a few empirical papers on the drivers and

consequences of value appropriation by platform owners (e.g., Edelman & Lai, 2016; Gawer &

Cusumano, 2002; Gawer & Henderson, 2007; Li & Agarwal, 2017; Zhu & Liu, 2018).

2

One impor-

tant but unexplored question is whether and how complementors adjust value-creation and value-

capture strategies when the threat of platform-owner entry increases. The conventional view suggests

that complementors should not react until the actual entry takes place (Goolsbee & Syverson, 2008).

This is because it is often risky and difficult to redeploy and reconfigure resources (Harrigan, 1980).

If complementors react too early and the actual entry turns out not to happen, it would impose sub-

stantial costs on the complementors. However, a competing view is that complementors should react

1

See, for example, https://www.nytimes.com/2018/09/19/technology/amazon-europe-margrethe-vestager.html, accessed

November 2018.

2

Note that the tension between platform owners and complementors does not have to arise from direct competition. Platform

owners, for example, may seek to capture more value by squeezing complementors (e.g., see the Taylor Swift and Spotify case

as well as Facebook's use of virtual currency credits and 30% cut from its game developers: https://www.theverge.com/2017/6/

9/15767986/taylor-swift-apple-music-spotify-statements-timeline and https://techcrunch.com/2012/10/05/more-competitors-

smarter-gamers-expensive-ads-less-virality-mobile/). Direct entry of platform owners is one of the most threatening and visible

ways of squeezing complementors and is thus often the focus of policy debate.

WEN AND ZHU 1337

from the onset of the process (i.e., when the entry threat increases but the actual entry has not yet

happened), as they could gain competitive advantages early and smooth out the costs of transitioning

over time.

In this paper, we take a first step toward evaluating complementors' ex ante actions in response to

a platform owner's potential entry. Focusing on settings where a platform owner has gained enor-

mous market power, we investigate how complementors adjust innovation and pricing strategies in

the presence of the platform owner's entry threat. Our theoretical framework is motivated by the

entry-threat literature (e.g., Goolsbee & Syverson, 2008; Prince & Simon, 2015; Seamans, 2012) and

the competition-driven repositioning literature (e.g., de Figueiredo & Silverman, 2007; George &

Waldfogel, 2006; Wang & Shaver, 2014). Our central hypothesis is that once a platform owner has

strong market power, the average complementor will accommodate the platform-owner entry threat

by reallocating innovation efforts from affected areas to unaffected areas. Meanwhile, in the affected

areas, it will focus on short-term profits in its value-capture efforts. We also predict significant het-

erogeneity in complementors' accommodation responses according to the popularity of their prod-

ucts: when the threat of platform-owner entry increases, complementors may increase innovation on

affected products if these products have a large user base. They use this response to position them-

selves either as strong competitors should the platform owner choose not to enter or as attractive

acquisition targets if it does.

The empirical context for testing our hypotheses is the mobile app market, in which third-

party developers typically develop apps for Google's Android system and/or Apple's iOS system.

We examine how, in response to Google's threat to enter Android app markets, Android app

developers adjust not only app prices but also the rate and direction of innovation. As direct com-

petitors in the mobile platform space, Google and Apple often follow each other's moves. Apple's

direct entry into an iOS app market therefore substantially changes Android app developers' per-

ceptions of the likelihood of Google's entry into the corresponding Android app market. Thus, to

capture Google's entry threat to various mobile app markets, we look at instances in which Apple

released its own apps on its iOS system but Google had not yet entered in the equivalent market

on Android. We use this empirical design to identify Google's threat of entry separately from its

actual entry.

We compile a list of apps and important iOS features that Apple released from 2007 to 2015 and

identify 31 entry events in which Apple directly competed with app developers on iOS. We then

map these events with the entry events in which Google released its apps on Android. We find that

84% of the time, Google entered the same app space. Among those instances, Apple entered before

Google 80% of time.

Given the data availability, our empirical analysis focuses on Apple's entry into three app spaces:

Flashlight, Guided Access, and Podcasts. For each, we use a combination of manual reading of app

descriptions and automatic search in the Google Play store to identify apps likely to be affected by

these entry events. Taking a difference-in-differences approach, we find that relative to unaffected

developers' apps in the same category, app developers vulnerable to Google's entry threat reduce

innovation on affected apps by 5.1% and increase these apps' prices by 1.8%. They do not, however,

abandon the platform; rather, when the entry is imminent, they shift innovation efforts to unaffected

markets, manifested in a 4% increase in updates on existing apps and a 3% to 10% increase in the

introduction of new apps. Consistent with our hypothesis, developers that have popular products

being affected by an entry threat react differently from other affected developers: they increase inno-

vation by 7.8% for affected apps and 15% for unaffected apps.

1338 WEN AND ZHU