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Keep It or Share It? Exploring the Impact of Platform Rent Appropriation on Quality of Complementary Products

Keep It or Share It? Exploring the Impact of Platform Rent Appropriation on Quality of Complementary Products

 
Mahdi Tavalaei, University of Surrey
Juan Santalo, IE Business School
Carmelo Cennamo, Bocconi University
 
Platform ecosystems are two-sided marketplaces in which one group of agents (complementors) introduce their (complementary) products for the other group of agents (consumers, buyers, or users). These two groups of agents constitute the two sides of the platform marketplace or ecosystem. The platform owner creates value for the agents on the two sides by mediating and enabling interactions among them. By defining the overall ecosystem’ objectives, members’ selection policies, platform architecture and design rules, and other governance mechanisms such as pricing and market transaction rules, the platform owner provides complementors with common assets and tools to build their own products as well as enabling them to access to a vast market of platform users (consumers). Bodreau and Hagiu (2009) call this as the regulatory role of the platform. They argue that platforms “regulate access to and interactions around [the platform] through nuanced combinations of a long list of legal, technological, informational and other instruments–including price setting” (p.164). Specifically related to our study, Boudreau (2010) in the context of handheld computing systems, studies how open versus close strategy in the operating system platform affects the rate of innovation from independent hardware developer firms (complementors). In another paper (Boudreau, 2012), he also investigated how crowding the platform with large numbers of producers of application software programs affects their nature of innovation incentive, as a result of tension between indirect network effect and competitive crowding effect.
Following this line of research, in the context of smartphone operating systems, we explore how platform strategies regarding the value extraction from complementors affect the products quality (and consequently consumers’ satisfaction). In this industry, a platform owner (such as Apple, Nokia, or Google) supports the technology, a set of tools such as software development toolkits (SDK) and application programming interface (API) along with marketing and advertising benefits (such as Top app lists) to incentivize third-party app developers for joining the platform and offer their products (apps) to the platform consumers (smartphone users) in the app marketplace (such as iOS App Store, Google Play, etc.). Yet, joining the platform requires some quality and design criteria, to be reviewed and approved by the platform owner. Upon approval and as the royalty fee, part of the revenue obtained by the app developer (via download, subscription, in-app-purchase, or in-app advertisement) is appropriated by the platform owner. Apparently, ease of review process for joining the platform and the revenue-sharing scheme affects the willingness of the developers to affiliate with the platform and publish their products compatible accordingly. Incentivizing the complementors to develop high quality and innovative products (e.g., by extracting less revenue from complementors) makes the platform more valuable for the consumers, and through the network effect, reinforces its value for complementors further. Yet, the favorable rent appropriation strategy can inflate the platform and diminish the benefit through competitive crowding effect. Also, it opens the door to free-riders to benefit from this “public good” (i.e. the popular platform) and on the investment of other complementors to sell their low-quality products (Cennamo and Santalo, 2018). Thus, the net impact is not clear a priori.
This study aims to explore this effect and its pertinent contingencies. In particular, in June 2016 Apple initiated a new revenue-sharing scheme in favour of app developers— “instead of keeping 70 percent of all revenue generated from subscriptions, publishers will be able to keep 85 percent of revenue, once a subscriber has been paying for a year”. This new model also was supplemented by few other incentives such as “improved app review times for developers”. In response, Google also introduced the same revenue-sharing model but did not apply it until January 2018. This context provides us with an appealing empirical opportunity to implement a quasi-experiment setting to explore the effect of this new revenue-sharing model in quality of the apps overall, in different product categories and in different time periods (short-term versus long-term).
We obtained weekly data for top 400 apps from September May 2015 to May 2016 for iPhone and Google app stores. We use the (natural logarithm of the) number of stars rating an app received (from zero to five stars) from users as the main dependent variable, proxy for the product quality. We try to explore the effect of the above-mentioned change in revenue-sharing scheme on the product quality introduced by app developers. We also investigate the possible contingencies of the impact in different app categories and different time horizons. To do so, we apply a difference-in-difference model, the exogenous shock being at 13th June 2016. As the new revenue-sharing scheme is only implemented in iOS app store, this platform construct our treatment group (being treated after enactment of new scheme in), while Google Play is considered as control group.

References

Boudreau KJ. 2010. Open platform strategies and innovation: granting access vs. devolving control. Management Science 56(10): 1849–1872.
Boudreau KJ. 2012. Let a thousand flowers bloom? An early look at large numbers of software app developers and patterns of innovation. Organization Science 23(5):1409–1427.
Boudreau KJ, Hagiu A. 2009. Platform rules: multi-sided platforms as regulators. In Platforms, Markets and Innovation, Gawer A (ed). Edward Elgar: Northampton; 163–191.
Cennamo C, Santalo J. 2018. Generativity Tension and Value Creation in Platform-based Technology Ecosystems. Organization Science. Forthcoming.