Winning the Connected Game
Winning in ecosystems requires winning more than just the execution race. It demands that you create coherent alignment among a network of partners, each of whom will succeed in their own execution, and each of whom is willing to collaborate productively with the other partners. How should you build this system?
More often than not, the answer is gradually. Constructing an ecosystem takes both time and direction. Like building any elegant structure, an ecosystem strategy requires a blueprint that lays out all the elements that will need to come together to create value. But it also requires a clear plan for the sequence in which the structure will be built.
In the world of product innovation, the standard development sequence transitions from the level of prototype (the development-stage notion of the value proposition) to pilot (a fully functional version of the final solution that is tested on a small, limited scale) to rollout (deploying the full value proposition at full scale). This approach is well suited to the world of stand-alone innovations, in which the construction of the offer itself is under your control.
But as we have seen time and again, the world of innovation ecosystems often requires a different approach. Here, the challenge is that delivering your value proposition requires multiple partners to agree, align, and commit. In this chapter we will consider an alternative pathway to scale. It is defined by three guiding principles for sequencing the successful construction of ecosystems:
1. Minimum Viable Ecosystem (MVE)—the smallest configuration of elements that can be brought together and still create unique commercial value.
2. Staged Expansion—the order in which additional elements can be added to the MVE so that each new element benefits from the system already in place and increases the value creation potential for the subsequent element to be added.
3. Ecosystem Carryover—the process of leveraging elements that were developed in the construction of one ecosystem to enable the construction of a second ecosystem.
I will illustrate these principles using examples of success in two industries. First, we will explore the way in which M-PESA, a Kenya-based pioneer of mobile payments, followed these principles to build a financial services ecosystem that was used by 65 percent of the Kenyan population within four years of its (re)launch. We will see how the combination of MVE and staged expansion offers a very different approach to commercialization and success than the usual mode of prototype-pilot-rollout.
We will then examine Apple’s journey over the past decade as it redefined success, and reconfigured the ecosystem, in three distinct markets: music players, smartphones, and digital tablets. We will also see how Apple used MVE and staged expansion to create its position in each market, and we will uncover the hidden source of Apple’s incredible success: the way it has applied the principle of ecosystem carryover to leverage elements and constellations from its old ecosystems to jump-start its construction of new ecosystems.
M-PESA: Creating Mobile Banking Services
for Unbanked Populations
M-PESA is a joint venture between Vodafone and Safaricom, Kenya’s dominant mobile network operator. Piloted in 2005, and then relaunched in 2007, it was built on a simple premise: use a (relatively) low-tech technology platform—SMS messaging—to enable money transfers by utilizing Safaricom’s national network of agents. The proposition was inspired by the fact that, while 81 percent of Kenyans did not have access to a bank account, 27 percent of its citizens owned mobile phones, and an additional 27 percent had access to one—and those numbers were rapidly increasing. (By the end of 2010, 63 percent of Kenyans were mobile phone subscribers.) M-PESA sought to deliver a basic banking function to Kenya’s huge unbanked population, facilitating commerce and entrepreneurship by increasing access to capital while reducing transaction costs—and to do it profitably.
In 2005, M-PESA (M is for “mobile” and pesa is Swahili for “cash”) launched a pilot test of its proposition by partnering with a local microfinance institution, Faulu Kenya. Faulu Kenya, which distributed small loans to groups of small business borrowers who would then assume a collective responsibility to pay back the money, provided the customer base for the pilot program while M-PESA provided the technology and delivered the mobile services. The idea was to offer a comprehensive financial service that would let users transfer money person to person, deposit and withdraw cash through a Safaricom agent, and use M-PESA to receive and repay their micro-loans—all without the need for smartphones, 3G, or any other new technology development.
The service worked in much the same way as prepaid calling plans, where users can recharge their account by purchasing additional minutes from an agent and registering the transaction with the operator by sending an SMS message with a PIN code. In the case of mobile payments, the payee would receive an SMS text confirming that a payment had been registered on the network and a PIN code they could show to any Safaricom agent who would then disburse the cash. The idea was powerful, the market was big, and the need was real.
Despite an enthusiastic launch, the pilot program quickly ran into hurdles. “We had too many challenges to mention,” said Vodafone’s Susie Lonie, the project manager on the ground in Kenya. Although the execution challenge of developing the technology platform was manageable, the initiative depended on collaboration between the highly divergent cultures of telecom (forward-thinking, rapidly developing) and banking (conservative, slow to change), and lived in constant fear of being shut down by regulators. M-PESA’s exact role—as a money transfer service, but also as an entity that allowed customers to maintain a noninterest-bearing account balance—was murky, given the fact that the company was not formally regulated as a financial institution.
Figure 8.1: Value blueprint of M-PESA’s 2005 pilot attempt.
More problematic were the hurdles that arose as a consequence of M-PESA’s partnership with its microfinance partner. The involvement of Faulu Kenya meant that considerable complexity was added to the consumer transactions to accommodate its particular lending models, treasurer accounts, and accounting practices. Faulu Kenya, wary about the novelty of the M-PESA proposition, chose to retain its paper-based back-office procedures instead of adopting M-PESA’s real-time data entry system. This resulted in a complex reconciliation process between the two organizations, which were moving at different speeds. According to Lonie: “The bottleneck in transferring the money M-PESA had collected in loan repayments to Faulu’s bank account was getting its books to a point where it could request the funds. To make M-PESA more suitable for [microfinance institutions], we need to create data export files that can be easily uploaded in whatever format their existing software requires.” The partnership between M-PESA and Faulu Kenya was a morass of interdependent processes that severely limited the success of the pilot. Reflecting on the challenges of the experiment, Lonie recalled, “It was clear that we would need to find a way to simplify things before launching a national service for millions of customers.”
Finding the Minimum Viable Ecosystem (MVE)
The M-PESA team went back to the drawing board and, in April 2007, launched a new initiative that took what had been a complex endeavor and focused only on its most basic elements. Rather than constructing the big picture all at once, M-PESA eliminated the key sources of coordination challenges—the banking component, which had introduced regulatory obstacles, and the micro-loan component, which had introduced the need to reconcile accounts across institutions. Instead it constructed the simplest ecosystem it could assemble and still create some new value. It identified its Minimum Viable Ecosystem (MVE).
For M-PESA, the minimum viable ecosystem would be the money transfer service, which is the heart of the M-PESA promise. By sending a simple, secure text message to the network, M-PESA customers could transfer money to other mobile phone users anywhere in the country. Kenya was already blanketed with kiosks where Safaricom agents sold airtime to mobile customers, and these same agents would facilitate the M-PESA money transfers, doling out the appropriate amount of cash to transfer recipients. And because no bank accounts were involved, the regulatory hurdles were much lower.
Figure 8.2: Value blueprint of M-PESA’s 2007 relaunch—the minimum viable ecosystem (MVE) of the money transfer offer.
Of course, launching even just the money transfer service was not without its challenges. M-PESA still faced obstacles, high among which was ensuring that the rural agents maintained a sufficient cash float. Since customers tended to make deposits in the city to send to outlying regions, where their relatives would withdraw the funds, rural agents could easily run out of cash. The solution entailed a change in the way Safaricom agents worked together. But the relationship with Safaricom was strong; the technology was preestablished; the demand was palpable—the expected relative benefit overwhelmed the adjustment cost, and Safaricom embraced the change. By December 2007, approximately 1 million customers had signed up for the service.
A smart sequencing strategy does not miraculously eliminate all the challenges involved in building an ecosystem. But starting with the MVE allows you to begin with the subset of problems you are best positioned to solve—those with the lowest levels of risk and highest levels of partner motivation. And having solved these, you will be in a better position to manage the partnering challenges of the next stage of development.
From Minimum Viable Ecosystem to
Staged Expansion
Having established a basic but demonstrably successful money transfer service, M-PESA began its staged expansion beyond its MVE, adding new partners to enhance the value of its core offer. It brought them on to its platform. And—unlike the pilot experience with Faulu Kenya, where the question of who will adjust to whom was the subject of active and ultimately unproductive debate—it brought them there on its own terms.
Figure 8.3: Value blueprint of M-PESA’s 2007 relaunch showing the initial minimum viable ecosystem (MVE) and subsequent expansion stages of the offer.
Within the first year, M-PESA had partnered with a number of retailers and utilities, making it possible for customers to use their mobile phones to pay bills and buy goods (expansion stage 1). With its commercial legitimacy now clearly established, in 2008, the company forged a partnership with PesaPoint, one of the largest ATM service providers in Kenya. As an alternative to the Safaricom agents, M-PESA customers could now choose the option “ATM withdrawal” from the M-PESA menu on their phone and receive an ATM authorization code for one-time use; no bank card required (expansion stage 2). And in 2009, M-PESA, in partnership with Western Union, introduced an international remittance service to enable money transfers from the United Kingdom (expansion stage 3).
By July 2009, two years after its initial launch, M-PESA had expanded its customer base to 7.3 million, with an agent network of over 12,000. Cumulative person-to-person transfers had amounted to an impressive $2.7 billion (Kenya’s GDP in 2009 was $63 billion). These strong numbers meant M-PESA was in a good position to expand its offering to add more formal banking services and insurance. This time, with proven commercial success and a history of reliable operation, the regulatory obstacle was much easier to cross.
In the spring of 2010, M-PESA did just that. In conjunction with Safaricom, the firm teamed up with Equity Bank, Kenya’s biggest bank in terms of client base, to create M-Kesho (kesho is Swahili for “tomorrow”), a financial service that combines the benefits of a bank account with the convenience of M-PESA. M-PESA customers could now enjoy an interest-bearing bank account, as well as services such as micro-savings and micro-insurance, all of which could be accessed from their mobile phones (expansion stage 4). In voicing support for the venture, Equity Bank CEO Dr. James Mwangi stated, “We want to ensure that no Kenyan is locked out of accessing basic banking services. If you look at other solutions in the market, nobody has put together all these services to provide this kind of convenience to the customer.”
By incorporating banking and microfinance services, M-PESA finally achieved the initial vision of the 2005 pilot program. Getting the value proposition right was not enough. Turning this vision into reality required a step-by-step approach: building initial value with an MVE offer (simple money transfer) and using it as a base for enhancing the core offer in a staged sequence (increasingly sophisticated money transfer).
A Choice of Paths: Pilots vs. Footprints
The M-PESA case offers a valuable contrast between two different approaches to building toward success. The path initially pursued by M-PESA in 2005, which was abandoned in the face of partner-induced complexity, exemplifies the traditional prototype-pilot-rollout approach to sequencing success: first, start with a prototype that offers a crude version of the full value proposition in order to test and validate the model; then, build a pilot trial that demonstrates the viability of the full value proposition on a small, testing scale; finally, launch the market rollout to deploy the full value proposition at full scale. The philosophy behind this approach is to validate the value proposition (prototype) and make sure it works in its entirety (pilot) before committing to scale (rollout). This makes a lot of sense in a world of products, where scaling is “simply” a matter of investing in volume production.
But in a world of ecosystems, the approach of scaling pilots is problematic—first, because it increases the extent of co-innovation and adoption chain risks that must be addressed from the get-go; and second, because even if the pilot demonstration is successful, aligning interdependent partners to simultaneously commit to a scaled rollout can be extremely challenging.* In the absence of a clear path to getting the system together at scale, ecosystem pilots languish and never get off the ground.
Underlying the failure of the initial M-PESA pilot effort was a combination of co-innovation and adoption chain challenges that were inherent in the nature of the value proposition (the need for regulatory approval, the need for accounting process reconciliation, etc.). But more than this, there was an inconsistent view of the venture’s value blueprint and a disagreement about ecosystem leadership among all the partners. While there was consensus between the M-PESA and Faulu Kenya teams about the overall value proposition, there was no consensus on the specifics of how the different activities would actually come together and, just as important, whose organization and procedures would change to accommodate those of the other. This is typical in the early stages of ecosystem construction, and the greater the number of early partners, the higher the likelihood of competing visions and aspirations.
Staged expansion from an MVE presents a very different path. Rather than the piloting approach of scaling up a fully developed value proposition, the MVE approach means that the innovator first rolls out a basic value proposition at commercial scale and only then moves to enhance the value proposition to its full potential in a series of staged expansions. The difference—in terms of leadership clarity, blueprint cohesion, and partner management—is staggering.
The MVE is focused on achieving commercial scale early—a broad deployment of a (relatively) shallow offer. With this as an established foundation, the conversation with potential partners shifts from “after we jointly get this system together, we’ll go find customers and then we’ll all succeed” to “I have an established customer pool that would appreciate the value proposition even more if you were a part of it.” By establishing a base of consumers, the MVE reduces (but does not eliminate) demand uncertainty for partners and lowers the hurdles to bringing them on board. In the language of the leadership prism we discussed in chapter 5, building out in stages from the MVE kernel makes it easier to convince partners of their expected surplus. And the organization that drives the MVE establishes itself as the de facto ecosystem leader—both because it has clear ownership of the customer base and because it is in control of the order in which additional partners will be invited to come on board.
Figure 8.4: Alternative paths to reaching full-scale ecosystem deployment contrasting a traditional pilot demonstration followed by a phased rollout and a minimum viable ecosystem (MVE) rollout followed by a staged expansion.
M-PESA’s 2007 money-transfer-only offer had all the characteristics of a perfect minimum viable footprint. It was simple, and therefore relatively straightforward to deploy; it was valued, and therefore able to attract demand among an initial group of target consumers; and it was extendable, and therefore able to accommodate the addition of new elements. Having established itself in the market, M-PESA was able to use this MVE as a platform on which to sequentially mount additional elements for the expansion of the proposition.
The hallmark of smart sequencing is that overcoming the challenges in each intermediate stage achieves two functions. First, it creates immediate value: each stage delivers a sustainable commercial proposition on its own. Second, it reduces subsequent challenges: achievements along the sequence are cumulative, such that progress in one stage feeds directly into progress in the next. By sequencing the construction of an ambitious ecosystem into a series of discrete stages, M-PESA was able to plot an incremental path to radical change.
Ecosystem Carryover: How to Build Success
upon Success
Driving staged expansion from an MVE is a powerful pathway to success. And continued expansion within the ecosystem is a compelling avenue to continued growth. Building a successful ecosystem, however, offers an additional strategy lever: Ecosystem Carryover, leveraging your success in constructing one ecosystem to create advantage in constructing a new ecosystem.
We can see the principle of ecosystem carryover underlying many successful transformations. For example, in the mid-1980s, Hasbro seized on the marketing formula of supporting its action figure toy lines (like G.I. Joe and Transformers) with comic-book stories and televised cartoon series. Twenty years later, it recognized the potential to carry over these elements from the toy ecosystem to create a new position in the media ecosystem. Taking its toys-turned-characters, their powerful brands, and the extensive mythology developed for the television series, it approached the Hollywood studios with the idea of playing an active role in developing feature movies around these characters. While the toy-movie link had been well established since the days of Disney and Star Wars, Hasbro’s initiative marked a major reversal of the relationship between the studios and the toy manufacturers. In the past, studios would create the movies and then license the various merchandizing rights to toy companies. This was the first time that a toy maker would take the leadership role, using its carryover to drive the moviemaking process, and capturing a much bigger share of the gains in return.
Medtronic, a leading medical device manufacturer and pioneer in cardiac rhythm management, has similarly pursued a combination of carryover and reconfiguration to create opportunities in new therapeutic markets. In a series of staged expansions from its MVE in pacemakers, it broadened its footprint within the cardiology sector to add integrated monitoring and diagnostic services. In doing so, it shifted its position from product supplier to health-care delivery partner. It expanded its links beyond cardiologists and patients to create new interactions with additional members of the hospital ecosystem, including information technology professionals, hospital administrators, and insurers. In parallel, it found ways to carry over elements from this expanded cardiology ecosystem to make inroads into new areas of the medical sector like neurology and endocrinology with innovative technology solutions like neurostimulation and implantable drug delivery systems.
FedEx’s growth from overnight shipping to orchestrating a range of supply chain and inventory management services, eBay’s extension from online auction house (its original MVE) to virtual shopping mall to e-payment broker (PayPal) to creditor (Bill Me Later), Facebook’s expansion from social network to media platform, and Amazon’s creation of business-to-business service offers alongside its retail operations were all driven by the same fundamental principles of MVE, staged expansion, and ecosystem carryover. Beyond a clear focus on their own capabilities, these firms were meticulous in their approach to configuring external elements around those capabilities. But while we can see these three principles employed by scores of successful organizations, no recent firm is a better exemplar of their use than Apple.
Apple’s Success in the New Millennium
Everyone knows that Apple has been on an incredible run for the last decade. But while a great deal of attention has focused on Apple’s sleek product designs, what is often misunderstood is Apple’s systematic approach to its ecosystem strategy—its hidden source of advantage.
Apple has no monopoly on great products, great interfaces, or a great brand. Apple’s product design is key, of course, but Apple’s rivals have been at its heels—behind but close—for years, even garnering praise for comparable design quality and better functionality. In awarding the Consumer Electronics Show 2006 prize for Best in Show, CNET’s editors commented, “iPod killer? With a brighter screen, better battery life, and more features, the Creative Zen Vision:M certainly has the goods to give the iPod a run for its money.” In 2009, Wall Street Journal tech guru Walt Mossberg said of the Palm Pre: “It’s a beautiful, innovative and versatile hand-held computer that’s fully in the iPhone’s class.” The following year, New York Times “State of the Art” columnist David Pogue remarked on the “gorgeous” Samsung Galaxy Tablet: “The dawn of the would-be iPad is upon us. . . . the Android tablet concept represents more than just a lame effort to grab a slice of tablet hype. As with Android phones, it represents an alternative that’s different enough to justify its existence.” Apple diehards will argue that Apple design is twice as good as the competition—but even that does not explain why the company’s market share is an order of magnitude greater than that of any other rival.
Nor is Apple unique in attempting to lead an ecosystem around its offers. A slew of high-tech blue chips—Nokia, Palm, Samsung, Sony, Cisco, Hewlett-Packard, Research in Motion, Google, Microsoft—pursued these same objectives for their various offers, with great vigor and, often, far greater resources. But as of the time of this writing not one has yet come close to Apple’s success.
The reason for this lies in the fact that, although all these firms share the very same objectives, Apple has pursued them in a highly distinctive way. No less distinctive than its products, but far less understood, has been Apple’s approach to innovating its ecosystems. And while Apple’s ability to create its MVE and then stage its expansion has been exceptional, my own view is that it is Apple’s mastery of the principle of ecosystem carryover that has propelled it so far ahead of its rivals. Its hidden point of differentiation has not been in its elegant products but rather in its approach to leveraging its advantage from one ecosystem into the next—a feat it has repeated as it extended its reach from MP3 players to smartphones to, most recently, tablet devices. How long its unique success will last is unclear. But its approach is timeless.
iPod: Staged Expansion
While the 1990s were rocky for former Apple CEO Steve Jobs, in the new century it seemed he could do no wrong. In chapter 6 we saw how Jobs constructed the iPod ecosystem. For his minimum viable ecosystem he carried over two elements from the Macintosh world—the Apple Store and the iTunes music management software—and waited for the other key elements—broadband and content—to arrive before he introduced his MP3 player into the marketplace. In 2001, the iPod player was rolled out. The MVE was in place.
Apple’s first expansion of the iPod ecosystem came with the rollout of the iTunes music store in 2003, which offered consumers an easy way to purchase legal digital music. The next expansion was to open the iPod platform to non-Mac users (almost inexplicably, the iPod was designed as a Mac-only product, and it took two years before Apple launched an iPod that could be enjoyed by the 90 percent of the world that used Windows and USB ports). This was followed by a series of exciting new iPod generations like the iPod Mini, Shuffle, Nano, and added features like video playback. Although the initial launch of the iPod was greeted with skepticism, within four years it was heralded as a monumental triumph.
Figure 8.5: Value blueprint of Apple’s iPod–the minimum viable ecosystem (MVE) of the music player offer.
Figure 8.6: Value blueprint of Apple’s iPod offer showing the sequence in which the ecosystem was constructed–minimum viable ecosystem (MVE) followed by online music store (expansion stage 1) followed by compatibility with the Windows operating system (expansion stage 2).
Enter the iPhone
By 2007, the unforeseen triumph of Apple’s iPod, boasting 100 million customers, had transformed Apple into a tech darling. Consumers and the media alike eagerly awaited the company’s next offering, and from January to June of that year, Apple’s stock shot up 44 percent in anticipation of a smartphone that would repeat the iPod’s success. At 6 p.m. on June 29, the iPhone, Apple’s entrant into the crowded smartphone field, was launched to a media frenzy. Jobs clearly saw the potential for profit: “It’s a huge market. I mean, a billion phones get shipped every year, and that’s almost an order of magnitude greater than the number of music players. It’s four times the number of PCs that ship every year.”
Still, success was not obvious. Smartphones were not a new proposition. Nokia had launched the Nokia 9000 Communicator, the first phone with Internet connectivity, back in 1996. In 2000, Ericsson released the R380, the initial mobile device to be marketed as a smartphone. A year later, Palm followed up with its version of a smartphone—the first to gain widespread use in the United States. And in 2002, a wave of devices hit the market: Research in Motion’s BlackBerry, Sony Ericsson’s P800 (the first smartphone to feature a camera), and Handspring’s Palm OS Treo (a combination cell phone–organizer–Internet terminal that also ran the thousands of Palm-compatible applications available for download online).
Once again, Jobs was late—five years late. And rivals didn’t seem to care. Reacting to Apple’s January 2007 announcement of the iPhone (six months before its launch), Jim Balsillie, co-CEO of BlackBerry shrugged, “It’s kind of one more entrant into an already very busy space with lots of choice for consumers. But in terms of a sort of a sea-change for BlackBerry, I would think that’s overstating it.”
Yes, it was beautifully designed, with a host of new features—a multi-touch screen interface, an innovative accelerometer, a full Web browser, novel applications like Google Maps and YouTube. But while it was highly advanced in some features, the iPhone was well behind the curve in others—a substandard still-image camera, an inability to record video, and shockingly, though launched as a data device six years after the start of the 3G revolution, the iPhone was a 2G dinosaur (the 3G version didn’t arrive until July 2008). Even more shocking, the phone was exclusively available from only one carrier in each country where it was launched (AT&T in the United States, T-Mobile in Germany, Orange in France, O2 in the United Kingdom, and Softbank in Japan). In a representative assessment, New York Times technology columnist David Pogue noted, “The bigger problem is the AT&T network. In a Consumer Reports study, AT&T’s signal ranked either last or second to last in 19 out of 20 major cities. . . . You have to use AT&T’s ancient EDGE cellular network, which is excruciatingly slow.” For years, users and reviewers alike would skewer AT&T for an epidemic of dropped voice calls at peak usage hours.
And retailing at $499 (with a two-year contract), the phone was significantly more expensive than any of the competition: Samsung’s UpStage phone, a smartphone that also included a music player, was priced at a mere $99 in 2007; HTC’s Touch, which included a touch screen, Wi-Fi connectivity, and Internet browsing, was priced at $250 with a two-year contract from Sprint. Finally, the iPhone took the idea of a closed platform to the extreme. In a press release, the company announced that any attempt to install a non-Apple application on the phone would void the warranty. Moreover, Apple warned that attempts to unlock the phone from the AT&T network would “cause irreparable damage to the iPhone’s software, which will likely result in the modified iPhone becoming permanently inoperable when a future Apple-supplied iPhone software update is installed.” Apple threatened to turn your $499 iPhone into a $499 iBrick! And it did!
Asked to react to the announcement of the iPhone, Microsoft CEO Steve Ballmer literally laughed out loud, “Five hundred dollars fully subsidized with a plan! I said that’s the most expensive phone in the world, and it doesn’t appeal to business customers because it doesn’t have a keyboard, which makes it not a very good e-mail machine. . . . We have great Windows Mobile devices on the market today. . . . I look at that [the iPhone] and I say I like our strategy. I like it a lot.”
But even as the competition laughed, Steve Jobs smiled. Within its first year of sales—and thirteen months before the advent of the App Store—6 million iPhones were sold. (And Apple could have sold more: the phone’s popularity meant they ran out of the older model six weeks before the July 2008 launch of the iPhone 3G.) What did Jobs see that his rivals didn’t?
Ecosystem Carryover: The Hidden Key
to Apple’s Success
When Jobs launched the iPhone, he didn’t just launch a beautifully designed phone that had a built-in iPod. Nor was it just a phone with an iPod and iTunes management software. Nor was it just a phone with an iPod, iTunes management, and wireless access to the iTunes Store. He carried over this entire constellation of iPod elements and one thing more: every iPod user’s entire library of music, playlists, album covers . . . it was not just the iPod elements that carried over, it was your entire iPod history.
Steve Jobs could smile because he knew what this ecosystem carryover meant. Of the 22 million iPods sold during the 2007 holiday season, 60 percent went to buyers who already owned at least one iPod. The iPhone was not going to be a new entrant fighting to capture attention in a crowded mobile phone market. It was the next-generation iPod. By carrying over the key elements of the iPod ecosystem, he would carry over his buyers too.
Notice that the principle of ecosystem carryover does not hinge on notions of switching costs or customer lock-in. The underlying philosophy behind those tactics is one of preventing end consumers from moving to rival offers. Their focus is on securing an existing position. In contrast, the intent of ecosystem carryover is to induce existing consumers and partners to participate in new value propositions.
Using Ecosystem Carryover to Drive Ecosystem Reconfiguration
On its own, this iPhone-as-next-iPod strategy enabled by ecosystem carryover would ensure that the iPhone would be a success with Apple’s consumers. But knowing you have a hit on your hands is one thing; knowing what to do with it is quite another.
The mobile phone industry had already seen blockbusters—Motorola’s RAZR, introduced in late 2003, sold over 50 million units just within its first two years; Nokia’s model 1100 sold over 200 million units between 2003 and 2007. These hits grew the mobile pie.
In contrast, Jobs would use his hit to change the mobile game. He would use his carryover from the music player ecosystem to reconfigure the smartphone ecosystem. In so doing, he would ensure that the iPhone would be a blockbuster for Apple shareholders.
The smartphone ecosystem was well developed by the time the iPhone launched, and the links among the actors were well established: mobile phone producers (Nokia, Motorola) sell their phones to various operators (AT&T, Sprint, Vodafone) who then package the phone with a calling plan and compete to sell it to consumers.
With the iPhone, however, Apple would reconfigure the ecosystem, adding new elements and redrawing links across the blueprint. It began with exclusivity. Apple would partner with only one operator in any country. (In the United States, Apple initially awarded a five-year exclusivity deal to AT&T, an agreement that was subsequently amended to allow rival operators to offer the iPhone in 2011.) This was a huge boon to the favored candidate: operators had long struggled to differentiate their offers, but with everyone offering the same handsets, customer loyalty and pricing power were both elusive as cell phone users hopped from one contract to the next, seeking lower rates, newer phones, and higher subsidies. And here was Apple, offering not just exclusive access to the most talked-about phone in history, but also exclusive access to Apple consumers—the most desirable customer segment imaginable (during the course of a two-year contract, the average iPhone user paid AT&T $2,000—$83 per month—double the amount paid by the average mobile phone user). And Apple would actively enforce this exclusivity on behalf of the operator by rendering modified phones inoperable through software updates—the iBrick threat. Not only would Apple deliver the customers to you as the operator, but they would guarantee to keep them away from your rivals.
Apple would also redefine the nature of the relationship between the handset maker and the operator. Unlike the usual supplier-buyer relationship between handset makers and operators, this was to be a partnership—with Apple as senior partner. While there would be a transfer of product from Apple to the mobile operator, there would also be a clear link between Apple and the consumers: they may be using your network, but they are our customers. Signing on as the exclusive operator meant signing away a lot of control—over marketing decisions and budgets, over the phone interface, and over the customer. And it also meant signing away revenue—after paying Apple for the phone, the operator would need to share a portion of every iPhone user’s monthly bill, estimated to be as high as $18 per user per month.* But the reward was high as well—around the world, high-end customers flocked to the iPhone operators. A successful ecosystem leader makes sure that followers win too.
The two-part secret to the iPhone’s early success was not that it was a great phone (it was, but this was not a secret) and not that it had an app store (that came later). First, the iPhone strategy explicitly carried over the iPod ecosystem and with it the iPod users. The iPhone started life with a built-in customer base. True, other firms had introduced new phones for which everyone in the industry had great expectations. But none of these predecessors had made the conceptual leap from strategizing better products to strategizing better ecosystems. Second, Steve Jobs—a master of the game—did more than just carry over his loyal customer base from one market to the next. Like Hasbro with the movie studios, he leveraged this crucial carryover to reconfigure the ecosystem, shifting his position from supplier to partner, to secure unprecedented control and an unprecedented deal with the mobile operators.
Staged Expansion of the iPhone Ecosystem
A year after the iPhone’s launch, Apple extended its ecosystem with the introduction of the App Store, an official platform through which users could finally download applications without fear of incapacitating their phone, and through which eager developers could finally present their programs to the world, and (potentially) profit from them. Apple released a software development kit for the iPhone in March 2008, and in July of that year the App Store was officially launched, offering 500 apps. Six months later, 5 million apps had been downloaded, and on January 22, 2011, Apple announced its 10 billionth app download. The App Store was another masterstroke. It made the device an evergreen proposition that could, with the tap of a finger, become ever more useful, more entertaining, and more customized to each individual user. It shifted the basis of smartphone customization from the manufacturer’s design of the hardware to the user’s own choices in selecting software.
Figure 8.7: Value blueprint of Apple’s iPhone offer showing the carryover elements from the iPod ecosystem and new links that comprised the minimum viable ecosystem followed by the addition of the App Store.
Staging expansion in this way allowed Apple to leverage partner collaboration while still preserving—for better or worse—almost complete control. The company retained strict jurisdiction over which apps it sold and which apps would be excluded from the platform. And the reason Apple was able to dictate terms to yet another community is directly linked to the success it created with the MVE before allowing the app developers to participate in the ecosystem. This approach of sequencing is at the heart of its approach to ecosystem leadership.
The iPad: Pioneering with Ecosystem Carryover
With the launch of the iPad in April 2010, Apple once again leveraged its success in one domain—phones—to drive success in another—tablets. But unlike the iPod and the iPhone, both of which were late arrivals in existing product categories, the iPad was an attempt to pioneer a new market space, “a third category of device, between a smartphone and a laptop,” as Jobs explained during a product event in January 2010. The iPad is a tablet “device” (not quite a computer, but far more than an e-reader), marketed to offer an enhanced multimedia experience. Users can watch videos, read books and magazines, access apps, listen to music, organize photos, play games, and browse the Web, all on a sleek device.
Despite the physical similarity to the iPhone from a product perspective, from an ecosystem perspective the iPad was a major strategy departure for Apple. With both the iPod and the iPhone, Apple launched products with value that was high on a stand-alone basis. Apple could establish the MVE with a tiny set of partners (none in the case of the iPod; just the mobile operator in the case of the iPhone). External partners clamored to join the party once it got going, but their support was neither needed nor welcomed at the start.
In stark contrast, the iPad is, at heart, a conduit for non-Apple content. For it to offer sufficient content to attract consumers, Apple had to convince publishers to take a bet on the device. Although Jobs was able to carry over the elements from the earlier ecosystems (the iTunes Store and the App Store), for the iPad to be anything more than an oversize iPod Touch, content from books, magazines, and newspapers had to be there from the beginning. The iPad was the first time that Apple confronted the need to start its journey with a host of initial partners. And to enable this process, Jobs carried over the newest asset that was created by the runaway success of the iPhone: the intense media hype that surrounded his every move. Eight months in advance of the iPad’s formal announcement in January 2010—and eleven months before its actual April launch—financial analysts, technology blogs, and the mainstream media were already obsessed. “It could be Apple’s latest billion-dollar jackpot,” the Observer speculated. According to the New York Times, “2010 Could be the Year of the Tablet.” And in the months between the formal announcement and the launch, Jobs fed the frenzy like a true media master: “There are already 75 million people who know how to use this because of how many iPhones and iPod Touches we’ve shipped.” Once again, there were millions of customers in his pocket, he implied, just waiting to get their hands on the next exciting device. Who’s coming aboard?
Publishers couldn’t resist Jobs’s siren call, and they dug deep in their pockets to create iPad-specific content. By the 2010 launch, Penguin, HarperCollins, Simon & Schuster, Macmillan, and the Hachette Group had all committed to providing books for the device, risking their relationship with Amazon. The New York Times agreed to publish a daily version of the paper specially tailored for iPad users. Rupert Murdoch even created an iPad-only newspaper, the Daily, “from scratch,” as he put it. And Condé Nast created iPad-only digital versions of its New Yorker, Glamour, GQ, and Vanity Fair magazines. Charles H. Townsend, president and chief executive of Condé Nast, said, “We feel confident enough that consumers will want our content in this new format that we are committing the resources necessary to be there.”
With a clear view of its MVE, Apple attracted the partners it needed in order to make the iPad a compelling proposition for consumers. It is interesting to note that, in signing up for the iPad, media partners were taking on a somewhat asymmetric risk. Publishers—always eager for a new sales outlet—were counting on the iPad to deliver millions of readers willing to pay for digital content. On the surface, this sounds like a fair deal. But think back to our followership discussion in chapter 5. The smart follower asks himself whether a potential leader makes money the same way he does. If the answer is no, then interests may be misaligned. With the iPad, Apple makes its money the moment a customer buys the device, which the promise of content has already convinced many millions to do. For the cash-strapped publishers, however, the up-front investment in reengineering their product, adding in-depth videos, interactive graphics, audio interviews, and myriad other features is only recouped on an issue-by-issue basis. For them, the question is not just whether consumers will flock to the iPad; it is whether, having paid for the iPad, these consumers will then be eager to spend—and spend consistently—on the content they have custom developed for the tablet.
Figure 8.8: Value blueprint of Apple’s iPad minimum viable ecosystem.
Ecosystem Leadership: Noblesse Oblige
This last point, however, points to a challenge for Apple and, for that matter, any highly successful ecosystem leader.
As critical to Apple’s continued success as managing competition with its rivals will be its ability to sustain productive relationships with its partners. Apple’s 2011 demand of a 30 percent commission on all subscriptions transacted on its platform was regarded by many partners as egregiously high, leading to public fallouts with content providers like the Financial Times, and cries of “Economically untenable,” in the words of one partner who then noted, “There are other platforms out there.” This is a major risk, one faced by any highly successful ecosystem leader—Apple and developers; Amazon and publishers; Hollywood studios and cinemas. As power grows, and grows asymmetrically, so too does the potential for abuse, intended or accidental. A leader who loses its followers loses its leadership. As success grows, so does the need not only to create surplus, but also to share enough of it to keep partners engaged, productive, and, to the extent possible, loyal.
The Stepwise Path to Success:
Beyond Diversification
Building a robust ecosystem is a progression that marries smart timing and smart strategy. Start by identifying your minimum viable ecosystem: what is the smallest configuration of core elements needed for your offering to create unique value? Assess the most advantageous order in which to add elements to expand the ecosystem: what element offers the best balance of enhancing the preexisting system and acting as a building block for subsequent expansion? Finally, consider what constellation within the current ecosystem can be carried over to help establish an MVE for a new value proposition and a new ecosystem.
In a product-focused world, much advice for diversification has concentrated on optimally exploiting core competencies. An early poster child was Canon, which was able to leverage its capabilities in optics and micro-mechanics and enter a broad range of markets, from cameras, printers, fax machines, and copiers, all the way to semiconductor lithography equipment. But a narrow focus on competence misses a critical dimension of the growth strategies of many of today’s leading firms.
Replicating Apple’s core capabilities in product design and component integration would not replicate their position in either current or future markets—it was not the innovative touch screen or elegant interface that drove successive wins in music players, phones, and tablets. They were necessary, but they were not sufficient.
This wide-lens view of Apple’s success has seemed lost on many of Apple’s rivals. In the rush to match the pieces, they have missed the critical connections that draw the entire ecosystem together into a coherent whole. They have brought plenty of money, talent, and ambition to the competition, but with few exceptions (most notably Amazon), as of the time of this writing their strategies have brought little in the way of ecosystem carryover to jump-start their value propositions. For this reason, they seem to start from scratch in new endeavors in smartphones, music players, and tablets, paying a high ante for their entry and a high subsidy for partner support.
Focused on matching the discrete elements of the value proposition, competitors press to grow the number of apps in their app stores, to create their own music download services, to incorporate their own multi-touch interfaces. Not enough, and not the point. It was Apple’s differentiated strategy for constructing its ecosystem that allowed the company to move so effectively from offering great products to delivering great solutions. And it was the consistent drive to leverage elements from one value proposition to the next, always with an eye on the MVE, staged expansion, carryover, and reconfiguration, that has allowed Apple to extend its advantage from one realm to the next.
The principles of the MVE, staged expansion, and ecosystem carryover are at the core of successful ecosystem strategy, regardless of industry or sector. They shed a clarifying light on success in an interdependent world and, I hope, on your own strategy as well.
