|Book Review: Catalyst Code|
Catalyst Code: The Strategies behind the World's Most Dynamic Companies
Written by: David S. Evans and Richard Schmalensee. Boston: Harvard Business School Press, 2007. 228+xi pages.
These two books share authors and a focus on a platform-based multisided business model. Multisided businesses drive down transaction costs between different groups of customers that would like to interact with one another. The authors write clearly and fluently, blending analysis of strategies with their research and observation of multisided businesses. Much of their work is in the software industry. Even so, product innovation managers from other industries will find they can use insights from these books to build multisided platform opportunities for their new products.
In a multisided business, platforms provide support for dealings among the various customer groups. In this model, each customer group needs access to the platform to reach the other groups. As an example of a three-sided platform, the authors cite a mobile- phone-based Web portal called i-mode. Launched by DoCoMo in Japan in 1999, i-mode has more than 50 million subscribers and more than 100,000 content providers. DoCoMo sells access to both subscribers and content providers. The packet-switched network DoCoMo built allows them to base subscribers' charges on the volume of data sent and received rather than airtime. DoCoMo handles all billing to subscribers, which offers content providers an efficient way to both bill for and deliver content.
By contrast, Apple's iPod/iTunes uses a one-sided or merchant business model. In a one-sided business, the platform buys and takes ownership of the products or makes them itself and resells them to the user. Apple licenses the music from content providers, sells it on its online store, and sells the iPod that plays only songs from iTunes: "iPod/Tunes is the only example of a pure merchant model we have seen among software platform-based businesses. Apple buys or makes the pieces necessary for making the iPod (with the exception of a variety of peripheral equipment), and it in effect buys the music from publishers and owners on behalf of iTunes users" (Invisible Engines, p. 257).
One-sided businesses view their world as a linear supply chain moving from raw materials to suppliers to manufacturing to wholesalers to retailers to the customer. The manufacturer in the middle of the linear chain has only one side facing the customers: the link representing the people or businesses manufacturers sell to. Kentucky Fried Chicken buys supplies and makes meals for its customers. The people who come in to buy a meal don't care where the chicken came from, and the chicken farmers don't care who eats their chickens.
Some one-sided businesses can morph into multisided businesses. Amazon.com started by selling books to customers online. As it grew and collected its audiences, Amazon launched an online shopping mall where sellers can interact with users. The mall now accounts for more than one third of Amazon's revenue.
Chemical catalysts bring about reactions that would not occur without the catalyst's presence or bring them about much faster, more specific, or at lower temperatures. Economic catalysts—catalyst businesses, which are the multisided businesses referred to by theCatalyst Code's title—are defined as "an entity that has (a) two or more groups of customers; (b) who need each other in some way; but (c) who can't capture the value from their mutual attraction on their own; and (d) rely on the catalyst business to facilitate value-creating reactions between them" (Catalyst Code, p. 3).
MasterCard, Microsoft's Windows operating system, and shopping malls are examples of catalyst businesses. These businesses owe their profits to a business model that makes it easy for buyers and sellers, developers and users, and shoppers and shopkeepers, respectively, to get together and do business. Catalyst businesses create convenient and appealing platforms that attract and benefit two or more customer groups.
In the authors' view, catalyst businesses may have one or more of three core catalytic functions. One is the matchmaker role typical of eBay or your local farmers market. A second is the audience-building role typified by Google or your local newspaper, which try to collect audiences that advertisers want. The Windows operating system and SAP enterprise software illustrate cost minimizing, the third role.
After devoting Chapter 1 of Catalyst Code to answering the question of what a catalyst business is, the rest of the book provides a frame for launching and continuing successful multisided businesses. Chapter 2, "Build a Catalyst Strategy," describes the six elements of the frame, each of which a following chapter covers. "Identify the Catalyst Community," knowing who needs whom and why, is the subject of Chapter 3. "Establish a Pricing Structure," covered in Chapter 4, describes how catalyst businesses' marketing sets prices according to who needs whom the most. Catalyst businesses don't insist on making profits from every side of the business. Their early goal must be to get each side on their platform and to get them on in the right proportions. "Design the Catalyst for Success," the third element, is the topic of Chapter 5: "More importantly, successful platforms compel distinct groups of customers to interact with each other. …Vanity Fairdoes this in a different way. Its advertisers want people to look at their ads, so the magazine encourages ‘interaction’ by spreading articles across its pages, thereby making readers flip through more of it. Readers benefit, even if they are annoyed, because attracting more advertisers enables Vanity Fair to afford to lower its subscription price and/or provide more content that readers like" (Catalyst Code, p. 41).
Chapters 6–8 cover the final three elements in the frame: focus on profitability, compete strategically with other catalysts, and experiment and evolve. The final chapter, "Cracking the Catalyst Code," highlights examples of the authors' view that elements of the frame are straightforward but that carrying them out is complex.
Three technological developments in the past 25 years are driving the growth of catalyst businesses. One is the rapidly dropping cost of computer processing and storage. The second is the great decrease in communication costs and the related spread of broadband connections. The third is the rise of software platform technologies—they are increasingly the invisible engines running many businesses.
Invisible Engines: How Software Platforms Drive Innovation and Transform Industries has 12 chapters. Chapters 1–3 comprise the first of four main parts. Chapter 1 defines software platforms, the businesses they power, and their basic economics. Chapter 2 describes the birth and evolution of modern computing in the late 1970s and the role of application programming interfaces in reducing duplication of programming efforts. Chapter 3, "Both Sides Now," draws attention to the authors' observation of the multisided nature of invisible engines.
The second major part of the book, Chapters 4–8, analyzes important industries in which software platforms play a preeminent role. This part begins with a reader-friendly history of personal computer (PC) software platforms, moving from the early 1970s to the current challenge by Linux. In Chapter 5, the authors show why the business strategy for video game software platforms is different from the strategy for PC software platforms even though video game consoles and PCs are technically similar. Business strategies for personal digital assistant software platforms are discussed in Chapter 6. Chapter 7 discusses software platforms for smart mobile phones and the complexity of the mobile phone industry. "Dangerous Intersections" is the title of the next chapter, which describes the essentials of digital media platform technology.
Each of the three chapters in the third part focuses on a strategic decision software platform producers must make and encompasses three decisions: (1) the scope and integration of the business; (2) how to get all the sides on board and interacting with each other; and (3) what features and tasks to include in the software platform.
The last part of the book comprises the chapter, "Swept Away," which describes the authors' vision of future opportunities for multisided software platforms: "Over the next decade invisible engines will transform economic life well beyond our living rooms, cars, and offices. They will change how we buy and pay for things. And they will cut a wide swath of destruction across many industries that have heretofore helped buyers and sellers find and do business with each other" (Invisible Engines, p. 341). However, as the authors state on the final page of Catalyst Code, "Indeed, the fundamental message of this book is that catalytic reactions are inherently hard to start and difficult to sustain and make profitable. Those who would succeed must find just the right balance that aligns the interests of the diverse members of the catalyst community. Not simple in theory or in practice, but, like hitting a baseball, many have nonetheless done it—and some have done it very well" (p. 203).
I judge that readers of JPIM will find reading Catalyst Code the quickest way to understand businesses that bring two or more different sets of customers together and get them to interact. Both books will repay the attention of readers who want clear knowledge of catalyst businesses.