8

Monetization

Working Out How and Where to Take Your Profits

MOST OF OUR DISCUSSION SO FAR HAS BEEN FOCUSED ON the key question of how you can go on creating new value by catalyzing, fostering, and shaping the development of your ecosystem as its leader. That might be a worthy goal in itself. But for your shareholders to benefit, finding a way to monetize your ecosystem is obviously also essential. In this chapter we explain how and where you can draw a growing stream of profits from your ecosystem and how to profit from an ecosystem in a sustainable way, nurturing your monetization engine rather than choking it, so that profits keep flowing.

The first point to recognize is that successfully developing your ecosystem and creating value is a necessary, but not sufficient, condition for delivering profits. You can lead the creation of a huge and vibrant ecosystem and still not earn a cent from it. In the world of ecosystems, leadership is no guarantee of riches. This cruel fact is nowhere better illustrated than in IBM’s experience with the personal computer (PC) business. We can avoid this trap by understanding how and why IBM fell into it.

Before IBM launched its first PC in 1981, the market for home computers was chaotic and competitive. Over the preceding twelve months, more than fifty companies had launched home computers, each with its own standards, protocols, and operating systems.1 IBM’s entry started transforming the industry almost immediately. Its reputation and relationships with American business ensured that the IBM PC became an instant hit.

For several years, there was, in fact, a shortage of IBM PCs because the company was unable to keep up with demand. Other computer-manufacturers, such as Columbia Data Products, Eagle Computer, and Compaq, stepped in to fill the breach by offering the next best thing: machines that were more or less IBM compatible.2 There were other suppliers too, like DEC, HP, and Olivetti, but all soon moved toward compatibility with the combination of IBM PC architecture, Microsoft’s MS-DOS operating system, and the Intel processors that had begun to emerge as an ecosystem. Less than a year after IBM chose Microsoft’s MS-DOS as its operating system, Microsoft had licensed MS-DOS to over seventy other companies.³

Over the next few years, start-ups flocked to join IBM’s ecosystem, along with more established players. Some, such as Tecmar, Quadram, and AST Research, are long-forgotten names. However, other partners in the ecosystem like Compaq, which was subsequently acquired by HP for $25 billion, and of course Microsoft, grew in size and importance.⁴ By mid-1984, 75 percent of all the software being written for home computers was for IBM PC‒ and DOS-compatible machines.⁵ The IBM-compatible architecture had established itself as the “dominant design” in the PC industry and the ecosystem around it had become the most powerful force in the market. In fact, IBM’s ecosystem became so dominant that Creative Computing magazine observed, “You don’t ask whether a new machine is fast or slow, new technology or old. The first question is, “Is it PC compatible?”⁶ Within a few years of the introduction of PC clones, almost all rival PC architectures had disappeared. Only a few home computers, such as the Apple II series, survived. IBM had established itself as the undisputed leader of the PC-compatible ecosystem.

In many ways, IBM, working in partnership with Microsoft and Intel, was an exemplary ecosystem leader. Just as we recommended in chapter 5, it provided a framework within which the ecosystem could improve its efficiency and grow. This covered everything from the choice of the chip through to the interfaces (such as the system bus), right down to the video controllers—as well as the operating system. Initially, this kind of leadership of the ecosystem seemed to be enough to deliver profits: IBM was making good money on its sales of PCs. However, by 1985, the PC shortage ended.⁷ A wave of inexpensive compatible machines, and in some instances even clones produced by American and Asian companies, flooded the market, causing prices to plummet. By the end of 1986, it was possible to buy a PC that matched the performance of a $1,600 IBM PC for as little as $600—or almost a third.⁸ IBM’s profit margins collapsed. IBM may still have been leading the ecosystem, but it had no ability to successfully monetize it. It was a cruel irony that at least two of its major partners, Microsoft and Intel, remained highly profitable while continuing to rely on IBM’s leadership for many aspects of the ecosystem.

IBM’s ability to profit from its PC ecosystem never recovered. Fifteen years later, in 2001, IBM lost $397 million in the PC business. Its losses continued in 2002 and 2003, and after losing $139 million on PC sales of $5.2 billion in the first half of 2004, it decided to get rid of the PC business. On May 1, 2005, IBM sold its PC business to the giant Chinese computer manufacturer, Lenovo Group, for $1.25 billion. In the Securities and Exchange Commission filing associated with the sale, IBM was forced to disclose that “the [PC] business has a history of recurring losses, negative working capital, and an accumulated deficit.”9

IBM’s experience is a powerful reminder that successful leadership of your ecosystem does not necessarily result in a profitable business. Despite leading the development of a PC ecosystem that created enormous value for customers and partners, a firm was unsuccessful in finding sustainable ways to monetize its position as an ecosystem leader. Monetization is one of the toughest challenges that faces any ecosystem leader.

Three Keys to Successful Monetization

Ecosystem leaders need to take specific measures to secure sustainable profit streams from the ecosystems they help create. After analyzing several ecosystems in different industries—some sustainably profitable, others chronically loss making—we have identified three keys to unlocking the profits in ecosystems. See exhibit 8.1.

One, as we analyzed in chapter 3, the ecosystem must be able to create offerings that deliver more value to the end user than any company can single-handedly provide. If the ecosystem cannot deliver additional value at a price that customers are willing to pay, there will not be any surplus to share. Ecosystems must create and grow the proverbial pie before carving it up. Therefore, you need a vision of the unique value the ecosystem can create, and a strategy to realize this vision, with the help of partners.

All the successful ecosystems we have described until now delivered new types of value to customers. Amazon and Alibaba delivered value in the form of greater convenience, more choice, and competitive prices. ARM’s ecosystem delivered a flexible, lower-cost, lower-risk solution to the needs of mobile handset makers than Intel alone could offer. For athenahealth, it is a software bundle offered to doctors and medical practices at a price that no other company can. DS created customized PLM systems for a wide range of very different industries.

EXHIBIT 8.1. Monetizing Value. Source: authors’ research.

Two, to extract profits from your ecosystem, you need to find what Iansiti and Levin in their early, influential book on ecosystems called a “keystone.” This is some element of, or activity in, the ecosystem’s value creation system that you can own and control, on which the ecosystem’s ability to create value for customers is dependent. Without that element, the ecosystem cannot satisfy its customers—just as a dome would collapse without its keystone.10 The keystone ensures the ecosystem will continue to need you. Part of the reason for IBM’s inability to sustainably monetize the PC-compatible ecosystem was its lack of such a keystone. While IBM provided many elements that helped the ecosystem to thrive, including the overall architecture and the specifications for many of the interfaces between components, it lacked a proprietary component that other participants would need to buy in order to serve their own customers.

To provide a sustainable flow of profits, the keystone needs to satisfy certain conditions. These are the same four conditions strategy theorist Jay Barney concluded that a resource must satisfy before it can underpin a sustainable competitive advantage: it must be valuable, rare, non-substitutable, and hard to imitate.¹¹ Only then can you use the keystone to extract profit reliably.

As we saw, ARM’s chip intellectual property (IP) satisfies these conditions for a viable keystone. It is an important contributor to the value the ecosystem provides to the customer, it is rare, and there is barely an alternative for it. Switching to an alternative would entail participants reinvesting heavily in training and tools and processes, which makes substitution an expensive proposition. In that sense, the participants in the ecosystem are held hostage by ARM’s chip designs. For that profit to keep flowing, the ecosystem leader’s keystone must also be hard to imitate. If it could be easily copied, other companies able to provide an adequate imitation would soon supplant a profitable ecosystem leader. Here again, ARM’s IP scores. To imitate ARM’s chip designs would require access to a large stock of accumulated knowledge, and access to complex knowledge about the technological road maps of handset makers and semiconductor manufacturers. These are only available from close and trusting relationships, which are typically slow and costly to build.

Three, you need to set up tollgates through which you can collect a share of the customer value that the ecosystem creates. To be profitable as an ecosystem leader, you need to create a mechanism that will allow you to charge for the keystone you contribute to the ecosystem. That mechanism—think of it as the design of a tollgate—may take the form of license fees, royalties, commissions on transactions that take place in the ecosystem, or a share of the profits on sales of products or services the ecosystem partners supply. The tolls need to be efficiently collected. Participants should hardly notice they are paying them. This will reduce the likelihood of them trying to bypass the tollgates.

Tolls based on the activity in the ecosystem give the ecosystem leader an inbuilt accelerator to grow its profits as the ecosystem expands. For instance, ARM monetizes its contributions to the ecosystem through one-off license fees paid by ecosystem participants as well as customers who want the right to its proprietary IP. ARM also charges a royalty on the sale of every unit of the devices embodying its designs. Thus, ARM derives a double benefit as the ecosystem expands: Its revenues and profits grow when new participants join the ecosystem, as well as when as existing partners grow their sales.

Now compare that with IBM’s original PC ecosystem. IBM laid out the ecosystem’s architecture, interfaces, and protocols, but it lacked an effective tollgate through which it could capture a share of the profits generated by the ecosystem. Its leadership and contributions clearly created value for all the participants, including users, but it was difficult for IBM to collect a license fee for its contributions. The architecture, for example, was difficult to capture in a single bundle that IBM could license to participants. When IBM tried to protect its IP and designs, the IBM-compatible makers found substitutes that allowed them to bypass IBM’s tollgates. Both Intel and Microsoft, by contrast, contributed IP that could be bundled into discrete components: the central processing unit and the operating system, respectively, which were essential to the system’s functionality. Intel’s CPU and Microsoft’s MS-DOS were perfect for tollgates; it was almost impossible to navigate around them. Consequently, IBM led the PC ecosystem, but Intel and Microsoft collected billions of dollars of tolls from the other participants.

Focus on Growing the Size of the Prof it “Pie”

In our experience, when executives start thinking about monetization in the context of an ecosystem, they focus on carving up the profit pie. They worry about who is siphoning profits out of the ecosystem, how they can increase their shares, and where they should focus to maximize profitability.

That logic makes sense in the context of a traditional supply chain, where prices and volumes are set by the market, making monetization a zero-sum game. That is, if one participant gets more, someone must get less. However, these are the wrong questions in the context of an ecosystem, where companies choose to align with partners in order to create more customer value and expand the potential for profits. As we have seen throughout this book, successful ecosystem leaders try to attract more customers, encourage more investments, and stimulate more innovation in the ecosystem. Those dynamics generate more customer value and increase the size of the ecosystem’s profits pool. Therefore, the first step in successfully monetizing your ecosystem is to make sure that you focus relentlessly on increasing the size of the pie. This should be the primary consideration in every decision you take.

Indeed, the focus on creating additional value should be so single-minded that it must exclude worrying about the distribution of the value between partners. That seems counterintuitive, but think again. Does it harm ARM’s prospects of monetization if it takes a decision that will increase the profits that semiconductor manufacturers earn? Will Amazon’s ability to monetize shrink if it finds a way to reduce the costs and increase the profits for the online sellers on its platform? The answer is a resounding “no.” On the contrary, these actions are likely to encourage partners to invest more in, and expand, the ecosystem. In the process, ARM and Amazon will create the opportunity to capture additional profits from their ecosystems, which will become larger and more robust. Moreover, the ecosystems will be more attractive to partners and more competitive against rival ecosystems. As a result, their possibilities for monetization will be further enhanced.

Ecosystem leadership is about creating the conditions for a positive-sum game, where the sum of the winnings and the losses are greater than zero. It does not matter how much your partners benefit from any action you take as leader. The factor that decides whether any initiative makes sense is simple: Will it benefit the future monetization engine by making the ecosystem larger, more competitive, or more valuable to customers?

In the world of ecosystems, a strategy that focuses on the division of the pie risks the network being stillborn. Trying to restrict the amount of money partners make is only likely to discourage them from joining the ecosystem or, if they are already partners, investing and innovating in it. Instead, ecosystem leaders must want them to be as successful as possible in creating value for the consumer.

There is however an important caveat. As the leader of an ecosystem, you cannot tolerate partners that milk the ecosystem of more value than they generate. If they did so, they would be squeezing the lifeblood out of the ecosystem. One of the leader’s roles, as we saw in chapter 6, is to weed out free riders who are damaging the ecosystem by siphoning off disproportionate amounts of value compared to what they are creating.

Securing Your Keystone Role

The next prerequisite for successfully monetizing the value that an ecosystem creates is to secure your keystone role so that you can go on extracting profits, year after year. To put it another way, you need to find a site for your tollgate that cannot easily be bypassed. That usually starts with one or more proprietary pieces of IP or other assets that the ecosystem needs in order to create value for customers: the initial keystone. To see in practical terms what that keystone looks like, it is worth revisiting the qualities a keystone needs to underpin a sustainable stream of profits.

The ecosystem leader needs to identify a keystone asset that helps the ecosystem generate value and is embodied in something that other participants in the ecosystem have to buy: a component, a design, or a service. It cannot be a public or ecosystem good that anyone can access without paying for it. Ecosystem leaders may need to provide ecosystem goods to facilitate the working of the ecosystem, such as interface protocols or shared knowledge—but if they want to monetize the ecosystem, their keystone contribution needs to be something they can own and sell to others.

We also saw that the ecosystem leader’s keystone—the core component, design, service, or other form of intellectual property that it contributes—needs to be something that is hard to copy. For instance, Amazon contributes excellent logistics infrastructure and software to its ecosystem. ARM offers its proprietary, low-power reduced instruction set chip architectures. For athenahealth, it is cloud-based billing and practice-management software. And DS has a number of very powerful proprietary algorithms that enable fast design and simulation. All of these four different types of keystone contributions are essential for the ecosystem to deliver value to customers and are difficult to copy. They are underpinned by proprietary IP and, importantly, years of accumulated knowledge and experience.

Even when backed by proprietary IP, however, no keystone can sustain an attractive flow of profits forever. Any contribution to an ecosystem can eventually be copied or substituted, given enough resources and time. Therefore, you need to update and evolve your keystone so that it can generate new and unique sources of value that participants in the ecosystem will continue to pay for.

Remember the case of Nokia, the leading supplier of mobile phones in the 1990s and 2000s. It contributed a number of key elements—such as expertise in wireless antennae, signal processing, and high-resolution camera technology—during the rise of its mobile phone ecosystem after 1990. Nokia and its ecosystem became so dominant that by the fourth quarter of 2008, it accounted for over 40 percent of all the mobile phones sold in the world.12 However, Nokia’s key contributions had been imitated or bypassed by then. That is why its newly appointed CEO, Steve Elop, wrote to the company’s employees in his very first memo: “I have learned that we are standing on a burning platform. And we have more than one explosion—we have multiple points of scorching heat that are fueling a blazing fire around us.”¹³ Nokia missed the boat on smartphones after Apple launched its iPhone in 2007, when it had the technical capabilities to produce smartphones. In fact, it had designed some precursors to smartphones in the late 1990s, but it never fully understood the need to renew what it offered to its ecosystem. Another shortcoming in Nokia’s strategy proved just as critical: its failure to recognize that, because app developers were by then powerful potential partners in its ecosystem, it had to create a keystone these developers would need to pay for if they were to continue to participate. Apple created such a keystone in the form of its App Store. Without this vital element, through which it could control app developers’ access to the ecosystem and collect a toll, Nokia no longer offered the ecosystem with something unavailable from elsewhere. In a few years, Nokia almost completely disappeared from the market, and what was left of its mobile phone business was sold to Microsoft in April 2014.

Having a keystone that enables you to “charge a toll” is clearly essential. However, no keystone will last forever. Thus, you need to be constantly updating and extending the value proposition on which your keystone is based.

The Role—and Limitations—of Scale in Sustaining Your Prof it Stream

The larger the scale of the ecosystem that you as ecosystem leader can catalyze around your keystone, the greater will be the size of the profit pool available to you. As in any business activity, greater scale results in lower costs. ARM can amortize the costs of designing a new architecture more effectively than any other company can because its designs became the global standard. Amazon has achieved such massive scale that it gets the best prices—and more—from its suppliers. The scale of its ecosystem enables it to support warehouses around the country, spread the fixed costs of state-of-the-art automation, invest in advanced software that optimizes its logistics, set inventory levels, and enable the prediction of customer orders so that stock can be locally positioned in advance.

Scale also makes the ecosystem more attractive to customers and partners because of network economies, as we have shown in earlier chapters. These include a greater choice of products and services and a lower risk of being stuck in a dead-end technology. By making it more attractive to stick with the ecosystem, rather than defect, the advantages of scale help protect the ecosystem leader’s monetization engine. For instance, no mobile telephone OEM would take the risk of using a competing RISC-chip architecture as long as the license fees and royalties that ARM charges remain reasonable. Doing so would reduce that OEM’s choice of semiconductor fabricators; necessitate investments in nonstandard development tools and training; and run the risk of disappearing into a technological cul-de-sac not supported by complementary hardware, software, or services. Likewise, even if Amazon chose to charge a premium, customers in the United States would continue to use it to enjoy the wider choice and greater convenience Amazon’s scale allows it as compared to other e-commerce ecosystems. Ecosystem scale thus underpins higher margins and a flow of profits for the ecosystem leader.

However, even scale cannot guarantee the sustainable monetization of an ecosystem. Netscape’s Navigator rose to become the biggest ecosystem in internet search with a market share of over 86 percent by May 1996.14 Just two years later, Microsoft’s Internet Explorer ecosystem had decimated Netscape’s leadership, bagging an estimated 96 percent share of browser usage. A key factor in the decline of Netscape’s ecosystem was a technological disruption in the form of Cascading Style Sheets (CSS), which enabled visually engaging webpages to be downloaded more efficiently compared with JavaScript. Internet Explorer was also helped by the fact that it was bundled into every copy of Microsoft’s Windows operating system, which had a 90-plus percent share of the desktop operating system market at the time.

This pattern was repeated in the second round of the browser wars. Scale again proved ineffective in protecting the dominance of the established ecosystem, when, this time, Internet Explorer was dethroned. A new business model disrupted its ecosystem and monetization processes when Google introduced its free Chrome browser in December 2008. Google pioneered the concept of rapid releases, launching seven versions of Chrome over the next year. The result was a relentless hemorrhaging of Internet Explorer’s users and partners. By May 2012, Google’s Chrome had overtaken Internet Explorer, and has since gone on to capture almost 60 percent of web browser usage while Internet Explorer has declined to less than 20 percent.¹⁵ By 2018, Microsoft had pretty much killed Explorer, and replaced it with Edge in Windows 10.

Using Your Position in the Ecosystem to Accelerate Innovation and Renew Your Keystone

If cementing a keystone and reaping the benefits of ecosystem scale are insufficient to maintain a stream of profits for the ecosystem leader over the long run, what else is required? In every case we have studied where the ecosystem leader has been able to sustain its profit stream, it has done so by using the ecosystem to accumulate fresh knowledge that allows it to renew its keystone asset. As ecosystem leader, you have a unique perspective on what is going on inside it. That enables you to learn from developments right across your ecosystem. Capturing and redeploying what you can learn from the ecosystem enables you to keep on innovating faster and more effectively than rivals, as well as any would-be usurpers among your partners.

However, this does not happen without effort. As the ecosystem leader, you need to focus relentlessly on how you can leverage the ecosystem to accumulate a rich haul of new data and knowledge. You then need to make sure you have the processes in place to act on what you have learned, using it to innovate, renew your keystone contribution, and strengthen your position in the ecosystem.

In e-commerce ecosystems, such as those led by Alibaba and Amazon, the flow of transactions provides the ecosystem leader with a treasure-trove of information about everything from the behavior of buyers and sellers to variations in prices, volumes, and geographic hotspots across a range of products and services. The key to sustainable monetization lies in using this knowledge generated by the ecosystem to innovate faster and more effectively than others do.

We have already seen numerous examples of how ecosystem leaders can do this. As we mentioned earlier, Alibaba’s Taobao Ke uses data from over five hundred thousand websites to adjust the advertising and offers that a user would view when logging in, depending on their location, time of day, and previous purchase history. Alibaba leveraged what it had learned from Alipay about the sellers on its sites, which covered everything from their revenues and returns to discounts and customer satisfaction ratings, in order to develop a new business through Ant Financial. Based on the same data procured from sellers’ e-commerce operations, Ant Financial extends loans to small-and medium-size businesses that lack credit histories. From its network of health care clients and partners, athenahealth was able to draw data that helped it to establish the MDP Accelerator, which assists start-ups with expertise and market intelligence to overcome the barriers in joining its marketplace, thereby fueling the growth of revenues and profits in its ecosystem. Similarly, Thomson Reuters used the data it accumulated from the farmers to develop more accurate forecasts for crop volumes and prices.

All these innovations were only possible because of the ecosystem leaders’ unique position as data and knowledge aggregators. As we discussed earlier, some data and knowledge must be shared with partners in order to maintain the health and vitality of the ecosystem, while some of it needs to be kept proprietary so that the leader can play the keystone role that underpins its flow of profits from the ecosystem. Making the right decision starts by developing an understanding of the keystone role, and understanding precisely which proprietary data and knowledge are necessary to preserve that role.

When making the decision of what data to share, a useful rule of thumb is to share information that flows through the interfaces in the ecosystem but keep proprietary the data and knowledge gleaned about the behavior of your partners. It is the latter that will enable you to innovate and renew your keystone contribution to the ecosystem. Alibaba, for example, has massive amounts of data about the identity of particular shipments and their whereabouts at any point in time. They readily share this with their partners, be it the logistics providers, insurers, or the suppliers and end customers. What they do not share, though, is information on the behavior of buyers and sellers. Keeping this proprietary helps Alibaba maintain their unique contribution to the ecosystems, ranging from ensuring website optimization to evaluating credit worthiness, and innovation in these ongoing keystone contributions enables them to sustain their profit stream.

Designing Your Tollgates

The right type of tollgates will be different for every ecosystem leader, but there are a few principles that can help you design effective and efficient tollgates and work out where to site them in the ecosystem. The most common menu of alternatives the ecosystem leader can choose from includes license fees, royalties and transactions fees, selling data value-added services, and using data and knowledge to create new profit streams. In what follows, we look at the pros and cons of each.

License Fees

The most obvious tollgate mechanism is to charge a fee from companies that wish to join the ecosystem. ARM, for instance, charges a license fee for the use of their chip designs. However, a joining fee has one disadvantage: It acts as a barrier to new entrants that may impede the ecosystem’s growth. So, while it is appropriate to charge a license fee when the benefits they gain are immediate and easily identifiable, doing so may dissuade potentially valuable partners from joining the ecosystem if they perceive the benefits to be less immediate. ARM has dealt with this challenge by charging a lump-sum license fee from its semiconductor partners, but at the same time providing tools and information for free to help developers that can use the ARM chip architecture. As we saw earlier, it licenses early-stage and start-up companies differently, recognizing their potential to become important partners. That reduces the hurdles to using ARM’s technology even as it allows fledgling companies to conserve their resources.

In most e-commerce ecosystems, the leaders, such as Alibaba and Amazon, provide access to sellers, buyers, and service providers free of any license or sign-up fees. That is because scale is critical for competing with e-commerce ecosystems. These ecosystem leaders, therefore, have located tollgates elsewhere to minimize the entry barriers. Apple is the sole exception; it charges $99 a year to list an app on the Apple App Store.16 Its strong, if not dominant, market share of the smartphone market no doubt provides it with the power to do so.

Royalties and Transactions Fees

Positioning the tollgate so that the ecosystem leader can profit from the volume of activity in the ecosystem by charging royalties or transaction fees has the added advantage of aligning the leader with its partners’ success. Royalties, and other transactions-based monetization engines, embody a simple, but powerful proposition: the more the partner earns, the more the ecosystem leader earns. ARM, for instance, collects a royalty on every chip that uses its architectures (sixteen billion chips in 2016), in addition to the license fees it charges.¹⁷ Likewise, athenahealth has moved its tollgates from selling software as a service to charging a commission on transactions, such as health insurers’ reimbursements, flowing through its ecosystem.

Amazon’s tollgates also work on the volumes of activity in its ecosystem. It makes a profit on all the products it sells from its inventory and collects a percentage of the sales price as a transaction fee on products sold by other retailers through its portal. Its Amazon Web Services ecosystem levies a fee for each byte of data transferred to and from its services, as well as a monthly fee for every gigabyte of storage used.¹⁸

Alibaba’s tollgates work differently. On its Taobao marketplace, which is designed for small merchants, no fees are charged from the sellers or buyers, as the objective here is to attract as many of them as possible and encourage them to transact frequently. However, on its Tmall e-commerce site, set up to appeal to major brands and larger retailers, Alibaba charges annual listing fees as well as sales commissions. That reflects the value that brands get in terms of exposure and sales from appearing on the site. As the Tmall ecosystem accounts for 56 percent of online shopping in China, brands have little option but to have a presence there.

The main potential downside of royalties and fees based on transaction volume is that customers and partners may extrapolate the total amounts they would end up paying in the future if their businesses grows, and take fright. The solution here for an ecosystem leader is to reinforce the point that the amount they are paying will only grow large if they are wildly successful, in which case they should be happy to reward the contribution made toward their success.

Selling Value-Added Services

The tollgate does not have to be situated at the entry to the ecosystem, nor does it have to depend on the activities that flow through it. Some ecosystem leaders monetize their investments by selling value-added services to participants; attracting customers and partners opens up the potential for additional services that they are willing to pay for. For example, Taobao’s over ten million sellers may well want to pay fees to improve their rankings on Taobao’s search engine. Similarly, The Guardian’s n0tice enabled users to place classified advertisements free, but The Guardian earns revenues by selling value-added services such as featured positions on the site or bigger advertisements.

Selling value-added services has the added advantage of helping potential partners to keep down the costs of their initial engagement with the ecosystem. However, this type of tollgate may make partners loath to deepen their engagement with the ecosystem, thereby limiting the potential opportunities for it to create new value.

Using Data and Knowledge to Create New Profit Streams

One of the most fertile sources of new profit streams is the data and knowledge that a leader is uniquely placed to capture. As we described earlier, Thomson Reuters developed an important new revenue stream by providing traders with improved forecasts based on the real-time, granular crop data it incentivized farmers to provide to the ecosystem.

Alibaba went a step further when it created the Taobao Ke revenue stream. It agreed with owners of third-party sites, ranging from social clubs to those providing transport schedules, to carry a link that would direct potential customers to Taobao stores. By aggregating and analyzing user data from websites that were part of the ecosystem, Alibaba was able to distil unique insights about how, when, and from where buyers arrived at sellers’ virtual shopfronts. Alibaba then suggested optimal links to both Taobao storeowners and websites. In exchange for improving the quality and volume of click-throughs, the owner of the shop paid Alibaba a commission of 10 percent of the gross sales revenues when a lead came from the website. Of this commission received, 90 percent was passed on to the owner of the website through which the customer originally entered the ecosystem, with Alibaba retaining the remaining 10 percent (or 1 percent of the gross sales revenue). The toll on sales may have been low, but with five hundred million to one billion users clicking on Taobao Ke every day, Alibaba was receiving a substantial new revenue stream.

An ecosystem can also provide its leader with a wealth of insights, other than data, that can be monetized. ARM’s business, for example, consists primarily in designing chip architectures for mobile phones. However, in the course of working with partners such as Qualcomm and Freescale, ARM learned about the emerging demand for tablet computers. Using that insight, complemented by what it had learned from other partners and some internal know-how, ARM was able to design new chip architectures for tablets. When the market took off after the release of Apple’s iPad (which included ARM chips), a fresh revenue stream opened. ARM has since entered a series of new application markets such as chip designs that can be used in cars and in health care, infrastructure, and wearable devices. Its next goal is to use the knowledge it draws from its existing ecosystems to become a major player in the Internet of Things (IoT) that is starting to connect billions of devices and machines around the world.

Using data and knowledge to create new profit streams is mostly pure upside. The only downside risk is the potential competition with partners who are looking to pursue similar profit opportunities, which may cause friction within the ecosystem.

Nurturing Your Monetization Engine

The final consideration when designing ways to best monetize your position and investment in the ecosystem is the need to capture profits without damaging its future. The temptation to maximize profits today at the risk of jeopardizing future profitability is an ever-present danger. As an ecosystem leader, you must always remember that companies join ecosystems out of their own self-interest—not because of a fiat. They too need to earn acceptable returns; otherwise, they will leave the fold.

As we highlighted in chapter 5, it is essential that the ecosystem leader encourages partners to invest in enhancing the ecosystem so that everyone in the system benefits. All the ecosystem leaders we have studied have had mental approximations of how much profit they could draw without impairing their ecosystem’s effectiveness and constraining its potential, and with it, their own. In some cases, their guidepost was a ceiling on the percentage of commissions, royalties, and transaction fees they thought it would be possible to charge without choking their monetization engines. In other cases, the ceiling was subject to precise analysis, such as working out exactly how much a partner would be willing to pay per unit based on the projected volumes, before it would become more economical to leave the ecosystem and take the work in-house. In yet other cases, the boundaries were drawn based more on informed guesswork.

Given that most transactions, activities, and partnerships where the ecosystem leaders erect tollgates are subject to some kind of ceiling, the leaders must diversify their revenue sources. That means designing multiple tollgates at different points in the ecosystem. Each one can then levy a smaller toll. Many of the ecosystems we analyzed, such as Alibaba, Amazon, ARM, and Thomson Reuters, generated profits from their ecosystems without inflicting too much pain on partners or customers by using multiple tollgates that they positioned at different points, each collecting a small fee.

Designing your monetization engine so revenues and profits grow as the ecosystem prospers and expands is also a good principle to adopt. Doing so avoids burdening the ecosystem with large fixed costs, which is especially important when it is small and underdeveloped.

Another rule of thumb is to vary the charges between participants, subsidizing some and demanding a higher proportion of the value created from others. It is in the interest of the leader to collect lower tolls from those who contribute enormously or those who derive less value, but nonetheless play a useful role in contributing to the health and success of the ecosystem. Alibaba, for example, invites small sellers on Taobao to join for free, with the option to buy value-added services, while large retailers on Tmall pay a substantial listing fee as well as commissions.

Questions You Should Ask Yourself When You Design a Monetization Strategy

Although the ecosystem leader needs to focus first on enabling the ecosystem to create value for its customers and engage with a growing number of diverse partners, the end-goal is to establish a sustainable stream of future profits. The leader faces a major challenge in finding ways to reliably monetize the contribution it makes to the ecosystem while maintaining its health and vitality.

In coming up with a viable monetization strategy, you need to answer the following questions:

1. Have you developed a credible strategy to enable the ecosystem to create more value than a company working alone by focusing on initiatives to grow the size of the value pie, rather than prematurely deciding how that pie is to be divided up?

2. Have you identified your “keystone” contribution to the ecosystem that is valuable, rare, non-substitutable, and hard to imitate, and so can enable you to extract a sustainable stream of profits in exchange for leading the ecosystem?

3. Once you have identified your keystone, how do you make sure it remains relevant by continually renewing the sources of value it generates, leveraging knowledge, and learning from across the ecosystem?

4. Have you put in place the right mix of tollgates through which to extract profits, including license fees, royalties and transaction fees, sales of value-adding services, and leveraging data and knowledge produced in the ecosystem?

5. Do you have the right balance between profiting from the ecosystem, investing in it, and damaging the ecosystem by “milking it dry”?