The grand-poppa of causality dilemmas has had many a philosopher frown in consternation and slap their forehead.
While the answer mostly depends on one’s position on the issue of creation versus evolution, in business, it occurs when the value proposition of two entities in a market are dependent on penetration in the other.
For example, in the wireless industry, mobile operators are dependent on cellphones penetrating the consumer market. Mobile operators make money by providing voice, text and data services to cellphone users on their network. In order for that to happen, a virtuous cycle must start, which drives up the number of cellphone makers making cellphones for the network and the number of cellphone consumers that use the network: but how does this happen when there are no cellphone buyers and cellphone sellers to start with?
The answer to this paradox is to build a platform not a product. Then bribe the chicken to “cross the road” from one side of the market over to the other with an economic incentive, a subsidy or charge.
In classical industries like car manufacturing, a widget’s value is consumed and depressed once the buyer drives the car off the lot. But in more unusual industries with multi-sided markets like communications and software, a widget can talk to another widget and a network effect takes effect. Consequently, the widget’s value comes not from its one-time use by the buyer, but from the number of widgets to which it can talk i.e. the number of smartphones one can call in their network. The more users the more valuable the network. Amplifying utility.
Apple, Google, Facebook, and Amazon are very hard to compete against not because of their products, features and functions but because of their platform and “spider” thinking. Particularly, Apple and Google are an entire spider-web-like ecosystem incorporating handsets, operating systems, and app stores which outside developers can “plug-and-play”, build on and co-create value. But the same network effects that drive their “platform stickiness” also make platforms taxing to build. Contrary to “Field of Dreams”, if you build it, they will not necessarily come. For one, once a new business is launched and commoditized, a platform tends absorbs it, adding it as a feature. Think Facebook, which was solely a social media platform. Now it has FaceTime, a telephony product.
The mother lode of all business models to conquer the chicken and egg paradox was the R&B model: Razor and Blade. The beauty of razor and blades was that it sold hardware, i.e. the razor at cost or loss and locked consumers in with add-ons, high margin blades. One cannot shave without the razor or the blade. The blades were consumables and provided a continuous revenue stream to recoup the cost of the razor, a durable. In digital, Google modified the classic R&B model by eliminating the upfront cost of a durable, investing billions of dollars in “Free” services and growing a portfolio of over-the-top applications like YouTube and Gmail to sell advertising against large audiences.
In the age of the connected economy, where digitization combines mobile apps, sensors and cloud data, total cost of ownership has been lowered. Owning assets and defending them from piracy and duplication means less than it once did. More than manifestos, businesses have become APIs(application programming interfaces) to be paired with other APIs. APIs are like spider webs that tech visionaries must pluck to find the food of opportunity and potential allies. For example, Uber is exposing a whole new dimension of connectivity for businesses seeking to enrich customer loyalty and drive up revenue beyond car-sharing services.
For business model innovation, one has to look at ecosystem economics and explore new values created out of the firm. They have to create a standard that lets other companies connect to it. This will mean increased innovation, quicker response to market, risk containment and a larger customer base. What chicken or egg doesn’t want that?