EXHIBIT 5.1. The AWS Ecosystem Architecture. Source: authors’ research.
Ecosystem Growth and Scale-Up
ONCE AN ECOSYSTEM IS UP AND RUNNING, THE ECOSYSTEM leader needs to focus on how it can be scaled up rapidly. This includes attracting more partners, encouraging them to invest in the ecosystem, facilitating learning and innovation, and balancing growth with the need to maintain the quality of what the ecosystem delivers to customers. So, the ecosystem leader will need to be part cheerleader, part orchestrator, part coach, and part “regulator” in the ecosystem.
By successfully playing these different roles, the leader will help the ecosystem grow, innovate, and create more value. But crafting the right set of initiatives to do this requires a careful balancing act. The ecosystem leader needs to provide an architecture that accommodates different partner roles. At the same time, this architecture needs to be flexible enough to avoid killing creativity and thwarting flexibility by putting partners into a straightjacket. Partners need to be given the space to innovate and grow within a framework that maintains the coherence of the ecosystem.
The initial roadmap for the ecosystem will need to be adapted and refined, without creating so much uncertainty that partners are dissuaded from making complementary investments that would help the ecosystem thrive. The ecosystem leader will need to shape the right kinds of interfaces between partners that create trust and smooth knowledge sharing so that transaction costs are reduced and the ecosystem becomes more productive. Flexible structures will need to be established to promote learning and innovation.
Getting this complex combination of things to happen coherently is a tall order. But, as we will see, successful ecosystem leaders have managed to pull it off.
Our first example is Amazon’s successful scale-up of its Amazon Web Services (AWS) business.1 It is an amazing story of how Amazon built a highly successful cloud-based infrastructure service by streamlining its own originally quite disparate IT infrastructure in response to the emerging needs of a few foundation customers. We will use this case throughout this chapter to show how Amazon and AWS developed a clear vision and roadmap to attract partners, explained the potential value proposition and set clear expectations for what they expected from a partner, lowered the barriers to entry into the ecosystem, and created an architecture for the ecosystem that made it clear to partners where they fit in. But let us start with a short description of what AWS is.
AWS, which provides cloud-based information technology services, has grown from being one of Amazon’s relatively unknown divisions to one of its biggest—quickly. The idea dates back to 2000, when Amazon wanted to launch an e-commerce service called Merchant.com to help retailers such as Target and Marks & Spencer build online shopping sites atop Amazon’s e-commerce engine. That was challenging. Like many start-ups, Amazon had not given much thought to standardizing IT infrastructure. Every business in the company focused on its own projects, with no thought to standards or scale. Amazon ended up with an IT mess that made it difficult to separate various services and make them available to third parties.
Amazon set about cleaning house, creating a portfolio of IT services that external partners could access over the internet through a set of documented application programming interfaces. That led Amazon, as Andy Jassy, the CEO of AWS, explained, “to pursue a much broader mission, which is AWS today. It allows any organization or company or any developer to run technology applications on top of our technology infrastructure platform.”2 Jeff Bezos, Amazon’s founder and CEO, later added, “We didn’t have that infrastructure. So, we started building it for our own internal use. Then we realized, ‘Whoa, everybody who wants to build web-scale applications is going to need this.’ We figured (that) with a little bit of extra work, we could make it available to everybody. We’re going to make it anyway—let’s sell it.”3
Amazon launched the new ecosystem in August 2006 with Amazon Elastic Compute Cloud (Amazon EC2), a web service that provided resizable computing capacity in the cloud. Based on feedback from foundation customers, Amazon combined EC2 with its Simple Storage Service (Amazon S3), which enabled storage in the cloud, to create AWS, a scalable, low-cost, cloud-based infrastructure platform. AWS then grew quickly. By 2008, it had overtaken the amount of bandwidth being used by all of Amazon’s retail businesses.4
Several well-known online businesses have been built on Amazon’s Web infrastructure, including the video streaming service Netflix. Other high-profile customers included Yelp, Foursquare, and a variety of US government agencies including the CIA. The AWS ecosystem brings together tens of thousands of partners, over half of whom are located outside the United States. These partners are of two types: consulting partners and technology partners. Consulting partners are professional services firms that help customers design, architect, migrate, and build new applications on AWS. Technology partners are those that provide customers with software solutions, developer tools, and management and security systems that are hosted on, or integrated with, AWS.5 In 2018, the AWS ecosystem’s market share was estimated to exceed 33 percent of the global cloud infrastructure services market, much larger than that of the ecosystems led by Microsoft, IBM, and Google—combined.6
As it expanded, AWS made a significant impact on the group’s financial results. In 2017, AWS reported sales of $17.5 billion, with an operating income of $4.3 billion. In fact, that year, AWS accounted for most of Amazon’s total profits.7 AWS achieved this record performance by first refining its vision and initial roadmap, and then by attracting large numbers of new and different partners.
Refining the Vision and Road Map
Many ecosystems begin life in a particular geographical region. Among our cases, athenahealth, Alibaba, and Amazon are examples of this. Geographic concentration has the advantage that partners tend to share a common cultural and business context. Proximity also makes communication between partners somewhat easier. But to gain the full potential benefits of an ecosystem, including access to the broadest range of diverse capabilities and knowledge, the ecosystem needs to attract partners and customers beyond its original geographic base. Both Amazon and Alibaba now benefit from the product, services, and know-how they have accessed by engaging with partners around the world. Expanding your ecosystem to attract dispersed and different partners and customers, however, also presents challenges. As an ecosystem grows and expands its boundaries, there is a danger that uncertainty and ambiguity will increase. New participants will bring their own objectives and cultures to the ecosystem. This diversity increases the risk that partners’ investment decisions follow divergent, or even conflicting, paths. It is also difficult for partners to understand causality in the ecosystem and where it is headed. Confusion could reign. This in turn increases the risk that well-intentioned investments in the ecosystem may prove useless, or even contradictory and destructive.
The vision and the road map for the future remain the two most effective levers that an ecosystem leader can use to reduce this uncertainty, attract customers, and help partners productively engage with the ecosystem and make the right investments to support its future growth. A clear vision is essential in getting potential customers to understand the value proposition the ecosystem will deliver; while communicating a transparent road map helps partners converge on a coherent set of product and service offerings that customers will value.
Amazon started with a clear value proposition for potential AWS customers: get rid of time-consuming, expensive tasks; innovate at the speed of a start-up; and reduce risk.8 AWS also enabled customers to purchase storage and computing capacity as and when needed, so they were charged only for capacities they used, sparing them large up-front capital expenditure. Deploying AWS allowed corporations, be they start-ups or established enterprises, to spend their resources on the features that differentiate their business rather than on servers or data-center operations.
Amazon also provided its potential partners with a clear vision for the kind of ecosystem that it wanted to create around AWS. Speaking to potential partners at a CloudTech meeting in San Francisco, Andy Jassy sketched out his vision for an AWS Partner Network (APN): “It would deliver all the potential of cloud computing by combining agility with breadth, offering a range of partner services from databases and computing power to applications services and management, continual innovation and iteration, and cost savings and flexibility.”9 Amazon described its vision as “a network of thousands of APN partners globally who are dedicated to taking cloud computing to the next level. The goal of the APN is to enable APN partners to successfully build their business on AWS by providing valuable technical, business, marketing, and go-to-market support.”10
At subsequent meetings, Amazon laid out its road map, including how it saw cloud computing’s future; the emerging roles it saw for partners in the ecosystem; the APN partner program involving training, certification, and partner learning plans; and its partner network marketing center, which was designed to disseminate best practices in marketing initiatives by AWS and its partners.11 The clarity and appeal of its vision of why and how partners should engage, backed by a comprehensive road map of how the ecosystem could evolve globally, attracted large numbers of partners, helping the AWS ecosystem scale rapidly. In 2017 AWS reported that it had tens of thousands of partners. And more than 60 percent of the partners were located outside the United States.12
Attracting More Partners
Laying out a clear vision for what the ecosystem could deliver and what it might look like, along with a revised road map to help it evolve and scale, are the first steps in attracting the attention of new partners to augment the mass, capabilities, and knowledge provided by the foundation partners that got the ecosystem going. Thereafter, the ecosystem leader needs to communicate a strong set of partner value propositions, clarify their expectations and help equip them to fulfil different roles, and make it easy for them to engage with the ecosystem by removing barriers that stand in their way.
Explaining the Value Proposition to Potential Partners
For most ecosystems, an important part of the scaling process is attracting new partners, often in large numbers. As in the case of foundation partners and customers, attracting new partners requires a strong value proposition. However, it also needs to be simple so it can be easily communicated en masse. The kind of value proposition that needs to be explained in detail in face-to-face interactions creates a bottleneck that is almost certain to stifle growth.
An important contributor to the rapid growth of the AWS ecosystem has been its simple and attractive value proposition. It offers partners four advantages:
• AWS will help your company drive revenues by providing tools and resources.
• AWS will provide programs designed to support your specific business objectives.
• AWS will enable you to differentiate based on your areas of expertise.
• And the platform will connect you to customers and prospects.
Offered such powerful benefits, partners joined the AWS ecosystem in droves—for example, more than ten thousand in 2017 alone. However, attracting partners is not sufficient. They need to be the right kind: partners that can bring capabilities and experiences that the ecosystem needs in order to succeed. The ecosystem leader therefore needs to create incentives to attract partners that can play different roles, such as providing the components of a solution, operational capacity, sales channels, complementary products and services, and so on. They can act as market makers, as important sources of technology and competencies, or maybe providers of market and customer knowledge for the leader. But to attract the right partners, the ecosystem leader needs to identify the capabilities it thinks the ecosystem needs in order to drive its growth and then design a set of value propositions that will appeal to partners that can fill the gaps.
What did Amazon do to identify the partners it needed for AWS? AWS identified that it would need three key types of capabilities to drive its growth: software solutions, technical consulting, and sales support. First, it needed partners that could provide software solutions that would add value to customer data and could be hosted on, or integrated with, the AWS platform. This would include software for specific functions such as handling security, big data analysis, mobile interfaces, digital marketing or data storage, as well as solutions designed for specific industries such as health care, manufacturing, logistics, or government. These would be provided by technology partners. Second, it needed the capability to help customers of all sizes design, architect, migrate, or build new applications on AWS. These capabilities would be provided by a range of professional services and consulting partners. And the third type of partners needed to bring sales capabilities, which would be provided by dedicated channel partners or by professional services and technology partners seeking to grow their own revenues by leveraging AWS as part of a package supplied to customers.
Because ecosystems are dynamic organisms that evolve as they develop, it is almost impossible for an ecosystem leader on day one to be able to come up with a complete and accurate list of all the capabilities and roles required to enable the ecosystem to scale. Inherent uncertainties mean that growing the ecosystem is inevitably an iterative process and probably also involves an element of serendipity. So, while it is important to have a clear starting point for the capabilities you expect the ecosystem to require, having flexibility while learning from experience is also key. This also has an upside: Incentives to attract particular kinds of partners may draw in different ones, bringing with them valuable new contributions that were not originally conceived of.
Clarify Expectations of Partners and Help Equip Them to Take On Their Roles
In this drive to attract new partners, however, ecosystem leaders need to balance the openness of their network with the need for quality. An unbridled drive for growth could undermine the ecosystem if too many weak and unscrupulous partners are admitted. Therefore, setting the right expectations for new partners is important. From the beginning, AWS made it clear what it expected from its partners. Andy Jassy told a room full of partners on the first day of an annual event called AWS re:Invent:
The reality is, we are going to direct business to those of our partners who are committed and who really understand the platform because our customers want partners who understand the details. . . . Those of you who get committed to understanding the details and the breadth and the depth of the platform, are going to be the ones that help our joint customers the most, and I believe will be the ones that have the most success as we go through the next couple of years where a lot of the playing field is going to be reshuffled.13
New partners may have to be developed and may need to be induced to improve the quality of their contribution to the ecosystem. Amazon offered to support committed partners by providing a variety of capability-building programs and marketing tools to help them strengthen their skills and acquire new customers. Based on the successful completion of these programs, as well as other factors such as revenue and customer references, partners could ascend through tiers, from registered through standard, to become advanced or premier partners. Partners could choose to focus on specific types of services or industry verticals such as Big Data or health care. Amazon would then validate a partner’s competency in those specific areas based on customer references, AWS certifications, Amazon’s evaluation of the partner’s technical readiness, and its volume of business through the AWS ecosystem.
Such a combination of improvement programs and certification is not unique to AWS. ARM adopted a similar strategy through its “ARM Approved” program. The chip-designer described the objective of the program as the mechanism “through which we enable our ecosystem partners in specific technologies and activities, so that they can support you better. Every ARM Approved partner has been through a robust audit process, which allows us to recommend them to you in their specific field.”14
Other ecosystem leaders have taken different approaches to maintaining quality during the growth phase. Alibaba, for example, admits new partners to its ecosystem without requiring payment of any kind of fees—which helps its ecosystems to scale quickly. Then, to incentivize quality improvements, ethical behavior, and good service, Alibaba publishes information to help customers and partners assess the capability and reliability of other participants. Alibaba.com, for example, contracted leading credit-rating companies in China to provide data for what were called Trustpass profiles. The Trustpass profiles displayed information about vendors’ creditworthiness along with data on them from customers who had used Alibaba.com. In the B2C space, it took another route to ensure ecosystem partners delivered quality. It introduced Alipay. After agreeing to a purchase, the customer would pay Alipay, where the payment would be held in an escrow account. The payment would be released to the seller only after the customer had notified Alipay that it had received the goods and was satisfied with their quality.
Managing an ecosystem is analogous to running a club. There must be requirements to gain membership, the need to contribute an annual fee to maintain membership, peer pressure, and the threat of expulsion for inappropriate or poor behavior. There can be differentiated levels of membership and roles with some members accepting more responsibilities and making larger investments in exchange for certain privileges, while associate members may have more limited rights and responsibilities.
On the one hand, it is critical to attract the right kinds of partners, support them so they improve their capabilities, and encourage high standards and commitment by rewarding those who deliver in the interests of the ecosystem. On the other hand, an ecosystem leader that sets the bar too high risks stymieing the ecosystem’s growth. If your ecosystem is to grow, it needs to be easy for the right partners to join. And there need to be mechanisms to induce and assist the partners to improve the quantum and quality of their contributions to the ecosystem.
Lowering the Barriers to Joining the Ecosystem
Another role of the ecosystem leader is to continue to remove unnecessary barriers to joining. That was an important ingredient in the rapid expansion of the AWS ecosystem. Jassy stressed how easy it was to join, “With our service, you read the documentation and you go.” Jeff Bezos underlined the point, “AWS is self-service: you don’t need to negotiate a contract or engage with a salesperson—you can just read the online documentation and get started.”15
When Thomson Reuters wanted to scale the ecosystem it had started around crop data, it focused on making it easy to join for the farmers whose data it needed. To create value, it needed input from large numbers of farmers producing soy, wheat, and corn. Only at that scale would the ecosystem provide a reliable picture of supply and quality. Thomson Reuters created a simple mobile app that farmers could download. The interface enabled farmers to upload data about the acreage they had planted, and provide regular updates on the condition of their crops, likely harvest dates, and yields. In exchange, farmers received aggregate information and analysis of trends, along with weather reports, global supply forecasts, and other market data. As the ecosystem scaled, new opportunities for value creation opened up. Once Thomson Reuters had a sufficient number of observations to provide data region by region, it could help farmers anticipate local gluts and shortages, and the likely pressures on transport and storage capacities.
It is not enough, though, to attract the right partners, help equip them, and lower the barriers that might dissuade them from joining. The ecosystem leader also needs to provide some shape and structure to the ecosystem, so that it strengthens the network and helps potential partners develop viable roles in the ecosystem. Indeed, an inappropriate architecture can become a bottleneck in the management of an ecosystem and the evolution of its capability to innovate.16
Laying Out a Viable Architecture
The architecture of the network of an ecosystem can take various forms. Amazon’s architecture for AWS, for instance, was based on a stack of infrastructure, products and customer services that could underpin a variety of customer solutions.
At the base of the stack was the AWS global infrastructure, which included forty-four Availability Zones consisting of one or more data centers, each with redundant power, networking, and connectivity, housed in facilities in sixteen regions around the world. The next level consisted of foundation services: computing, storage, database, and networking capacity provided by AWS. These services were linked to a level that contains software and services, organized into five domains: client-side data, server-side data, network traffic, operating system and security, and applications. These domains could be provided by one or more external partners, with each element linked through the stack to the customer’s data using standardized interfaces and protocols. The customer buys from some mix of the AWS marketplace, professional services, consulting or technical partners, or via a network of reseller channel partners (see exhibit 5.1).
Around the stack is the AWS Partner Network, described earlier, that provides business, technical, marketing, and go-to-market support to help partners profit from the ecosystem more effectively. Next to that sits the AWS Marketplace, an online store that helps customers find, buy, and start using the software and services they need. Visitors can use AWS Marketplace’s 1-Click deployment to launch preconfigured software and pay for what they use, by the hour or month. AWS described its Marketplace as a structure that “complements programs like the Amazon Partner Network and is another example of AWS’s commitment to growing a strong ecosystem of software and solution partners.”17
The existence of a clear architecture enables partners to identify their optimal roles in the ecosystem and to connect with each other while helping customers navigate the ecosystem to find the products and services they need. It is neither a hub-and-spoke network, in which AWS would sit at the center and orchestrate every move, nor a focused alliance, where AWS would specify roles and deliverables. In the AWS architecture, partners can come and go, reposition themselves and their relationships with AWS and other partners, even as they enable customers to assemble solutions à la carte.
But there is not just one architecture for ecosystem networks. An interesting alternative is that provided by ARM. ARM’s ecosystem architecture was not a stack, but a series of concentric circles (exhibit 5.2). At its core were around twenty strategic partners that had the ability to influence the technological direction of the industry because of their market power or technological prowess. These were mostly OEMs, such as Samsung, and chip fabricators, such as TSMC. The quality of ARM’s interactions with them were so important to the success of its ecosystem that it assigned one of ARM’s top management team to manage the relationship.
The members of ARM’s marketing team worked with each partner as a sort of super account manager. For example, ARM’s marketing person for the mobile phones segment was responsible for building relationships with all the managers in different parts of the Samsung Group to develop a picture of their emerging needs for mobile phones. Similarly, ARM’s sales team transacted directly with Samsung’s semiconductor division, and also developed relationships with other groups within the company, as that might influence the role ARM technology played in its future chips.
The second concentric ring in ARM’s ecosystem consisted of OEMs that had less influence over the industry’s future, as well as design support and software partners that supplied products and services essential to creating a new product using ARM’s IP. Among them were partners specializing in electronic design automation (EDA) tools as well as design. These partnerships ensured that ARM’s technology was compatible with any of the design options that an OEM or chip-fabrication partner might adopt. Coordinating with these partners reduced the need for engineers to retrain on new tools, and also reduced the time to market for customers incorporating ARM technology. Other partnerships with software providers ensured that ARM’s designs were compatible with a range of operating systems and operating environments. These partners had been slotted in the second ring of ARM’s ecosystem because the knowledge that needs to be exchanged between them and the rest of the ecosystem was less complex, and simpler interfaces proved to be effective.
The third ring comprised partnerships with early-stage and start-up companies that were linked to the ecosystem through light-touch interactions, and was focused on providing them with the tools and other support needed to integrate ARM technology into their products. The primary role of these partners was to build new product prototypes that helped the ecosystem keep on innovating.
The final ring in ARM’s ecosystem architecture was home to a broader community numbering tens of thousands of developers and other participants. Their links to the ecosystem were facilitated by the ARM Connected Community website. Managed by a dedicated ARM executive, the online community provided free access to extensive resources for developers; a forum for developers and engineers to exchange ideas and get support in the ARM ecosystem; and company and product listings classified by product category, market application, and ARM technology—all linked to partner sites.
Again, no one architecture is right for every ecosystem. The right architecture will vary with the specific needs of every individual ecosystem.18 The architecture needs to mirror the technical challenge and complexity posed by the value that the ecosystem must deliver.19 As a general rule the ecosystem leader should aim to promote an architecture for the ecosystem that combines several niches, each of which makes a different contribution to customer value and creates a virtuous spiral by generating new knowledge or additional demand as they interact. Of course, each “niche” may be large in terms of volume and revenues, and may also contain many partners. Competition within each niche may generate benefits for the ecosystem by encouraging rivals to improve efficiency or drive innovation.
The AWS architecture defined these niches in resale, consulting, technology, infrastructure, and so on. The point is that they defined areas in the ecosystem where partners with different types of capabilities can prosper. The stack architecture illustrated by the AWS case tends to be most appropriate when the customer needs to buy a bundled solution comprising a number of different components supplied by partners with different offerings. The stack provides a clear menu to help customers choose what they need. They can “pick and mix” to assemble the solution themselves, or rely on a single supplier who draws together the right combination of different partner offerings to satisfy the customer’s needs. It also helps partners decide where to play and how they can best work with other partners with complementary capabilities.
The concentric circle architecture illustrated by the ARM case tends to work well when the ecosystem leader needs to interact in different ways with the partners (and possibly more intensively with some partners than others), in order to achieve the necessary knowledge sharing and co-innovation. By identifying an inner ring of a few strategic partners where messy, often tacit, knowledge needs to be exchanged, an ecosystem leader can focus on creating channels for the “high-touch” communication required by this group. The structure of outer rings, meanwhile, where the need for codified knowledge and prepackaged information can be exchanged with a larger numbers of partners, enables the use of more cost-effective communications technologies. Again, the architecture also helps partners decide where to play and how best to engage.
Whichever architecture you choose as an ecosystem leader, there are no doubt two important design considerations. First and as a general rule, one should avoid any overlap between the ways in which each niche contributes to the value that the ecosystem delivers. That is because the interfaces between the elements will become blurred if the niches overlap. Uncertainty and confusion will result. The ecosystem leader’s aim, therefore, must be to develop a structure where each bundle of value-creating activities is clearly delineated from the next. A well-defined modularity may well be a precondition for an effective ecosystem.20
In addition, to enable the ecosystem to scale, the jigsaw of niches must be complete. All the tasks and capabilities that are necessary to deliver value to the customer need to be covered. This may seem obvious, but there is always a risk that critical gaps may be overlooked. For example, in businesses characterized by network effects—where the user benefits only when a critical mass of others adopt the same technology—market making is an essential ingredient for value creation. But since it may not be directly required to deliver the product or service, the need to attract partners with this critical capability is easily forgotten. AWS deftly avoided this trap by considering the role that different partners, even those supplying specific pieces of technology or software, could have in enhancing sales of the AWS package or in helping to make the market by expanding awareness of the benefits of cloud computing.
Protecting Partners’ Turf
Having designed an architecture that opens up attractive niches for different partners to contribute to the capabilities and growth of the ecosystem, the ecosystem leader must refrain from intruding into the specializations or the businesses of its partners. If niches in the ecosystem turn out to be profitable and fast growing, the temptation for the leader to start competing with its partners can be great. A “land grab,” however, is sure to undermine the credibility of the leader, and can cause growth of the ecosystem to stall. Potential partners are likely to be scared away if they have reason to fear that if they build a successful business, the ecosystem leader will try to take it over.
Ecosystem leaders also need to strike a balance between the growth of the ecosystem and short-term profit opportunities. Researchers Gawer and Henderson described how Intel, for example, had adopted different approaches to do so. It had chosen not to encroach on some of its partners’ markets, while entering others that were becoming core to its own value proposition, even in the face of damaging its relationship with its partners.21 Arguably, the latter has limited Intel’s ability to expand its ecosystem.
Amazon rethought the balance between network growth and corporate profits as its ecosystem grew. After it opened its Amazon.com e-commerce platform to third parties and supported them by providing storage, shipping, payments, and customer service through its ‘Fulfilment by Amazon’ service, many retailers complained that once they tasted success, Amazon would enter the category and use its size and power to undercut prices and capture market share. That eroded the trust between Amazon and its retailer partners.22 Amazon is much more careful now to avoid behavior that would create such conflicts; it recognizes that the benefits gained by attracting new retailers greatly outweigh the reductions in direct sales. AWS has taken this lesson to heart: it provides hosting and web-services capacity to Netflix even though the latter competes with Amazon’s video streaming services.
ARM learned early to be careful about suspicions that it would encroach on its partners’ territories. ARM’s semiconductor customers were not happy to be bypassed when ARM increasingly talked to the OEMs directly. Some feared that joining ARM’s ecosystem would end up commoditizing their products, lowering switching costs, and reducing their control over prices. Despite these risks, many semiconductor companies realized that they stood a better chance of winning business from the OEMs if they worked with them, rather than relying solely on their contacts. Despite being the leader of what became a huge and well-established ecosystem, ARM continued to take such partner concerns seriously.
To allow the ecosystem to scale, the ecosystem leader sometimes has to get out of the way. Recall the example of Taobao stepping back from various activities that we mentioned in chapter 1. Daniel Yong Zhang, Taobao’s president, explained,
Taobao used to organize a lot of small-scale, thematic promotional events to try to drive sales—even down to things like a special Spring-Festival promotion for red sweaters. Over time, the number of these new promotions grew, so new ones were launched three or four times per day. When Taobao was smaller, this part of the business used to count for 30% of our revenues. When Taobao’s turnover increased, these promotional events became redundant, accounting for only 0.8% or 0.5% of the gross value flowing through the marketplace. They were enormously time consuming and complex to set up; the Taobao team had to find relevant products one by one, and negotiate participation with each seller individually. All this complexity was absorbing 80% of the time of Taobao’s marketing staff. We had to stop these promotions because we were becoming the bottleneck. We had to understand that in an ecosystem, doing less can lead to exponentially more.23
Some of these decisions were relatively easy, he observed.
It is very clear that Alibaba should not sell products, but the boundaries of the leader’s role are not always easy to determine. Take software services. In principle, Alibaba knows it should leave them to partners although in the short-term, it would have been easier for Alibaba to provide this service. But that would lead to unsustainable complexity and fragmentation. The solution has been for Alibaba to provide the basic building blocks such as the exchange platform and a rudimentary CRM system for every shop owner on Taobao. Alibaba is clear that it will not provide anything that is useful only for a single seller or even a small group of seller—only things to be used by large numbers of participants.24
Making space for partners as the ecosystem scaled up was very much in Alibaba’s self-interest. Explained Alibaba’s Ming Zeng, “If there are problems, for example, failures in logistics, Alibaba is usually the last to be able to help. It is much better to rely on third parties to see the opportunity to profit by providing an improved service. Just like the government trying to manage the market is a disaster, if Alibaba tries to be smart and fix a problem, it usually messes up the system.”25
Stimulating Partner Investments
The successful growth of an ecosystem also depends on partners investing to increase the capacity and capabilities available to the ecosystem. Indeed, one of the key benefits of an ecosystem strategy for an ecosystem leader is the ability to leverage investments made by partners. The benefits can be huge. For example, according to our estimates, developers have by 2018 invested over $440 billion to create the 2.2 million apps available on Apple’s App Store.26 As the ecosystem leader, Apple charges a small amount for listing every app and takes a commission each time one is downloaded. Apple generated over $9 billion of revenues from services in the quarter to March 2018, most of it from the App Store. This represented a 31 percent rise over the previous quarter, putting it on track to achieve its goal of doubling software and services revenue by 2020.27
To derive those benefits, the ecosystem leader needs to get partners to invest. The dependence of the ecosystem leader on its ecosystem to deliver value has a second implication: it is difficult, if not impossible, for the ecosystem leader to grow faster than its ecosystem. Therefore, the ecosystem leader must succeed in getting partners to invest at a rate that ensures both innovation and the desired expansion of the ecosystem.
High levels of uncertainty will of course dissuade partners from investing in the ecosystem. As we saw with kick-starting the ecosystem and attracting foundation partners, providing a clear vision and road map for the future evolution of the ecosystem is key. Not only does it encourage partners to invest, it also helps them make the right kind of investments. An important role of the road map is to reduce the uncertainty around the technologies the ecosystem will adopt as it grows. This is particularly important in industries with rapidly changing technologies, where a dominant design has yet to emerge.28
A shared road map for innovation, even if it is not highly specific, will enable partners to make sense of unforeseen events and induce them to keep making investments that scale the ecosystem. To see how this works, let us return to the case of Dassault Systèmes and how they encourage co-investment through a clear road map. Indeed the many partnerships in the DS ecosystem are coordinated by a clear and shared technological roadmap of how software platforms for computer-aided design, virtual production and testing, global collaborative working, and social collaboration will evolve. The road map contains information about which new industries DS wants to find applications for, how the company wants to address specific industry needs, what the role of 3D will be, what the timeline for development of enhanced platforms will be, and so on.
Another way in which ecosystem leaders can encourage partners to invest is through the provision of tools and training programs that will enable them to upgrade their capabilities. We have already described earlier in this chapter with the case of AWS the benefits of equipping partners to perform their roles in the ecosystem. Providing well-structured tools and programs makes it easy for partners to invest in improving their capabilities, as well as making sure they invest in the right capabilities—those that will be aligned with the needs of the ecosystem and the opportunities it is likely to provide in future.
The resources that AWS provides through its APN program have stimulated thousands of partners to invest in developing their capabilities to provide consulting or technology solutions built around AWS. The APN offers a large suite of programs that enables partners to invest in competences that help grow their businesses as well as the AWS ecosystem. These include online modules and assessments that partners can use to improve the skills of their executives in business development, relevant technologies, and cloud computing applications. APN also offers opportunities for face-to-face training in solutions, the use of Big Data, and tools for the delivery of professional services. These investments help the AWS ecosystem deliver more value to customers and attract additional buyers, growing the ecosystem and driving up Amazon’s revenues.
Making it easy for ecosystem partners to invest in the right kinds of capabilities also helps Amazon avoid the threat of commoditization. This is a challenge that Amazon’s cloud business faces, given the competition from powerful players such as IBM and Google. It would force Amazon to compete on volume and price, causing margins to collapse. That may still happen, but Amazon has so far managed to stay ahead of rivals, in part by encouraging its ecosystem partners to invest in raising their game, adding more value to AWS through the products and services they have built on top of its infrastructure.
It is clear that AWS takes the requirement for partners to invest seriously. Recall Andy Jassy’s exhortation at the first AWS annual partner meeting, “The reality is, we are going to direct business to those of our partners who are committed.” He could have added that those who failed to invest in the ecosystem probably wouldn’t see too many leads coming their way. Thus, to stimulate the partner investment an ecosystem needs to grow and prosper, ecosystem leaders might need to use a mix of carrots and sticks.
The ecosystem leader also has to often encourage partners to invest in more than training. To enable an ecosystem to scale, they need to invest hard cash in everything from new infrastructure to redesigning their products and services. Stimulating those investments requires targeting the right partners, aligning with their incentives to invest, and making complementary investments of your own.
Alibaba’s experiences with growing its Rural Taobao ecosystem shows how that can be achieved. Following its IPO in 2014, expanding e-commerce into China’s rural areas was one of the three main strategies Alibaba announced (along with globalization and Big Data). China’s rural regions presented enormous, largely untapped opportunities for the development of e-commerce. Around six hundred million Chinese citizens resided in rural areas, representing a huge pool of purchasing power as well as a source of distinctive needs. Most, however, had limited retailing options and suffered from the prevalence of counterfeited products. Fewer than one in three rural residents were connected to the internet, and in the first quarter of 2015, less than 10 percent of the online purchases made on Alibaba Group’s retail marketplaces were shipped to rural areas. The low penetration of e-commerce, even among those who had internet access, was largely a consequence of limited marketing initiatives targeting rural customers, as well as the lack of local sales advice.
Catalyzing the growth of a new ecosystem to serve a potential market of six hundred million people was a massive challenge. Even for a company with considerable financial resources, it would not have been possible for Alibaba to do so had it not been able to get partners to invest in making it happen. To get the ball rolling, Alibaba had to make significant seed investments. In October 2014, it announced that it would invest RMB 10 billion (US$1.6 billion) over the next three to five years to build one thousand county-level Taobao Rural Operations Centers and one hundred thousand village-level Taobao Rural Service Centers throughout China. These outposts of e-commerce would provide villagers the facility to buy and receive goods from Alibaba Group’s online marketplaces and, eventually, start online businesses. These centers would provide hardware, e-commerce training, technical support, and information about promotional offers on online marketplaces. Beyond facilitating the purchase and sale of products online, they would also be conduits for people living in remote villages to conduct a range of everyday activities, such as paying utility bills, topping up mobile phones, making travel bookings, and so on.
The opportunity looked attractive, but to get these rural operations and service centers up and running would require investment well beyond even Alibaba’s means. In additional to physical space, each center would require a bundle of computer equipment including a large-screen display as well as a datalink with reasonable speed and capacity. Alibaba approached the provincial, county, and village administrations in China. And it found the key to getting them to invest buried in a central government press release. Following a directive from China’s State Council, the focus on GDP growth in assessing local performance had been broadened to include social inclusion and the well-being of the local population. With an incentive to deliver on this new performance indicator, local governments enthusiastically embraced the opportunity, leading many provincial and county governments to include provision for co-investment in building local Taobao service centers (at an estimated cost of $7,000 to $15,000 per village) in their annual budgets. By the end of 2015, more than twelve thousand village-level service centers had been opened in over twenty provinces. In addition, 598 counties and municipalities in twenty-six provincial-level units had invested in e-commerce training for more than fifteen hundred local government officials.
The next challenge Alibaba faced was in staffing these centers with trained personnel—as important a requirement for success as equipping them with hardware. To facilitate this, it set up a network of county-level centers to train people from the local community interested in becoming qualified Rural Taobao Partners. Alibaba targeted young people familiar with the internet and online shopping, who were returning to their villages from the city. Located in each village-level service center, the Rural Taobao Partners helped villagers order and pick up what they needed—physical products, train tickets, mobile phone top-ups, and so on—and handle refunds on products returned. They would also sell local products online, handle delivery, and collect payments. The partners generated income primarily by charging service fees for the above. As of December 2015, there were 5,870 Rural Taobao partners in China, each earning between $300 and $450 per month. The more successful Rural Taobao partners earned up to $2,500 per month.
Alibaba also has to deal with some major constraints in growing its e-commerce ecosystems, such as the problem of fake and contaminated products, especially in food and beverages, such as “eggs” made of gelatin or rice containing a substantial proportion of plastic pellets. In 2008, an estimated three hundred thousand babies in China fell ill, and at least six died, because of consuming milk powder that was adulterated with melamine, a toxic industrial compound.29 To deal with that constraint, Alibaba convinced dozens of brand owners including L’Oréal and chocolate maker Ferrero Rocher to attach a QR code–based ID tag to every item they produced. Alibaba’s Blue Stars program constructed a database of these codes and made them available over the internet. When consumers scanned the QR codes on product packages in stores, they could view data from the manufacturer such as the origin of the product. As a result, online shoppers could verify the authenticity of goods and obtain refunds if they turn out to be fakes.
Getting Your Ecosystem to Scale
Having kick-started the ecosystem, you need to grow it by bringing in new partners, often in large numbers. In order to do so, the ecosystem leader needs to provide compelling value propositions to attract partners with different capabilities and reduce the uncertainty and other barriers that could deter new entrants. That requires coming up with answers to the following questions:
1. Are your vision and roadmap sufficiently clear in encapsulating the opportunity to create new value for customers, and helping reduce uncertainty and ambiguity that might scare off potential partners?
2. What is the simple and compelling value proposition that will encourage potential partners to engage with the ecosystem?
3. Do you have a clear view on what capabilities and roles you need to develop the ecosystem? And do you have a plan to attract partners beyond the foundation partners?
4. Do you have a good understanding of what barriers the new partners have to overcome to join the ecosystem? And can you reduce these barriers?
5. Can you design an architecture of your ecosystem with clearly defined niches in which partners can thrive? And have you ensured that you have clearly defined areas for value creation that do not overlap?
6. What mechanisms do you have to protect your partners’ contribution and ensure you don’t encroach on their business activities?
7. What incentives have you put in place to stimulate your partners to co-invest in the ecosystem?
