Platform governance with multi-homing complementors

Platform governance and design are vital to cater to the essential value-adding complementors to your platform ecosystem. In addition, the degree of platform openness, modularity, and compliance to input modules (SDKs) determine if complementors will multi-home.

Complementors - Valuable innovation and specialization on your platform

Platforms consist of a stable set of common technological assets and standards used across a product family. As a result, the functionality of a platform can be extended by third-party innovators that leverage the platform's standardized interface upon which they can innovate and create their value-adding complementary products. 

Hence, many platform owners' primary focus is to coordinate autonomous innovators by standardized interfaces instead of hierarchy or market, so many external actors can join the platform ecosystem and create valuable complementary products for platform users. 

Technology industries typically include firms cospecializing in varying domains of expertise and originating from diverse sectors, such as those providing hardware devices, networks, software products, and even content.

As a result, platforms leverage the productive potential of distributed innovation agencies and economies of specialization. Therefore, platform owners should strive to attract an increasing number of complementors, which are the source of indirect network effects, but at the same time try to prevent them from supplying the same complimentary product to their rival platforms, also called multi-homing.

Multi-homing complementors'

To platform owners, complementors' multi-homing can undermine the platform's advantages derived from network effects and its differentiated market position. Complementors, on the other hand, often have incentives to multi-home due to cross-platform scale economies. Relative to the cost of product development, the returns from expanded market reach could be substantial. Multi-homing also allows complementors to counter the risk of hold-up and expropriation by platform owners.

Nevertheless, multi-homing does not come by quickly for complementors. Extant literature suggests that complementors face multi-homing costs primarily from the platform's technological design.

Multi-homing demand asset specificity

While advanced technological architecture is a source of differentiation and competitive advantage for platform owners, it may limit the overall quality of multihomed complements. This is because reconfiguring an existing complement to a more advanced architectural design incurs high costs due to asset specificity in product development. Such costs are often non contractible and may discourage potential complementors. There will also incur governance costs to complementors ascribing customization to other ecosystem participants other than the platform owner.

Since ecosystem complexity raises the cost of product customization, complementors will be less willing to port an existing complement to a more complex ecosystem, that is, less likely to multi-home. However, the negative effect is weakened as the complementor has more experience with the destination ecosystem or when the complement exhibits a greater level of modularity.

Platform governance design

Platform owners' governance design may create friction between platform providers and complementors. While open governance grants greater autonomy to platform providers, it also cultivates a more complex ecosystem for complementors. 

"We define an ecosystem as comprising a multilateral set of firms that are individually autonomous yet depend on one another to materialize a value proposition (Adner, 2017)"

Platform owners assume the unitary role of orchestrating platform ecosystems. They set non-pricing governance rules for complementor, providers, and other ecosystem participants with clearly defined roles and mandates. The platform's governance design is primarily about partitioning decision rights between the platform owner and ecosystem participants to access, augment, or distribute the platform technology.

Read more about platform ecosytems and roles

An open platform design

An open-governance design implies the devolution of decision rights from platform owners. More open decision rights will translate into more autonomy for third-party producers that adopt the platform. Furthermore, since these cospecialized producers possess more knowledge about the niche market they serve than the platform owner, an open design would result in enhanced specialization and better servicing of customers' heterogeneous needs, thereby improving the overall value proposition of the ecosystem.

In contrast, a closed design allows the platform owner to retain proprietary control by limiting other parties' decision rights to the platform and its technology. But this increases the multi-homing cost for competitors. As a result, the strategic trade-off on how many decision rights the platform owner should abdicate has been a central question in platform research.

Open design lead to ecosystem complexity

Compeeting platforms may display differentiated governance designs from fully open to fully closed. For example, in more open platforms, platform owners distribute more decision rights to platform providers, allowing them to maintain the interface through which users consume complementary goods and experience the platform. Where direct access is granted to complementors, the platform owner's role becomes more oriented around being an orchestrator in regulating complementors. This open platform governance design may very well lead to frictions in collaborative production in an ecosystem.

Ecosystem complexity refers to the structure of interdependence for complementors, defined by the number of unique components in the ecosystem that they need to interact with to materialize their value proposition.

The greater the number of unique components, the higher the ecosystem complexity for complementors. Within a platform ecosystem, complexity stems mainly from the allocation of decision rights between platform owners and providers. 

Different platform providers seek to augment the platform interface to best suit their customers' immediate needs and differentiate them from rivals. However, platform interfaces are the main junction points in the ecosystem. Therefore, decentralizing interface control could undermine standardized assets' stability and raise ecosystem complexity.

Example: Androids’ ecosystem

In a smartphone platform ecosystem like Android's, we can distinguish between the Andriod platform, Google as the platform owner, Samsung and Huawei as platform providers, and APP developers as complementors. Platform providers and complementors are "producers" in this ecosystem, while "consumers" are end-users of smarts phones.

In this Android ecosystem, the open governance delegates the role of platform providers to smartphone producers. Android's open platform permits handset makers, such as Samsung, HTC, and Huawei, to produce and distribute Android-based devices and manage the interface between app developers and consumers by reprogramming the platform.

These distributed decision rights result in many differentiated, nonstandardized Android operating system versions. Each configuration of operating systems and handsets constitutes a unique platform interface. The growing number of unique interfaces leads to a more complex structure of interdependence in a smartphone ecosystem. 

Conflict of interests with multi-homing 

From the ecosystem perspective, platform openness enhancing the variance in hardware devices also increases the risk of ecosystem complexity for complementors. That results in frictions between hardware development and complement production because of their conflicting goals: While hardware producers seek differentiation in their market, complementors pursue a more extensive market reach with minimal marginal cost. To multi-home, a complementor must reconfigure an existing complement to the specifications of the destination ecosystem and particularly to a new set of platform interfaces.

The greater the number of unique interfaces a complement is customized against, the more complex trade-offs complementors will face in product redesign. For example, a design interacting well with one interface may fall short in compatibility with another. That elevates nonfungible, ecosystem-specific learning and adaptation costs for complementors. Thus, complementors will be less likely to customize an existing complement to a more complex platform ecosystem.

The greater the complexity of a destination ecosystem relative to a complement's original ecosystem, the less likely the complement is to multi-home onto that destination ecosystem. While the complexity of destination ecosystems deters multi-homing because of increased costs in reconfiguring an existing complement, this main effect is likely to be heterogeneous. Relative ecosystem complexity varies depending on the complementor's destination ecosystem experience and modular components.

Ecosystem experimental knowledge lower the multi-homing cost.

Complementors' experiential knowledge helps absorb complexity-induced multi-homing costs. However, such knowledge is often acquired through learning by doing, and this is because of a lack of formal communication channels among loosely coupled organizations in an ecosystem where coordination is achieved via standardized interfaces instead of overt communication. 

Complementors with more experience with the destination ecosystem understand better the integration of their existing designs with unique interface specifications and where adaptations may be necessary to accommodate customization requirements. Furthermore, given improved search efficiency and diminished experimentation costs, experienced complementors will need less investment to attain customized complementarity. That enables them to multi-home and exploit cross-platform scale economies, despite the high level of destination ecosystem complexity.

Platform modularity lower complementors' multi-homing cost.

Due to modularity in platform architectures, knowing the detailed workings of all other interdependent parties is unnecessary. However, without such knowledge, complementors can still leverage the capability of cospecialized parties in product design, production, and delivery.

The modular architecture of platforms facilitates the supply of complements and induces continuous development of technical inputs comprising these remarkably complements. Modular technologies allow fungible inputs to be separated and recombined into innovations.

Input modules, used as building blocks, can be created independently without knowing how they will be ex-post bundled by various complementors 

Third-party input modules / SDKs'

The risk of ecosystem complexity and multi-homing costs opens a competitive market for third-party firms and individuals who cospecialize with complementors and supply heterogeneous input modules. They may build on platform owners' technological resources to introduce more advanced and diverse functionalities. They may also assimilate certain complementors' innovative features and best practices into their input modules. 

"Complementors can eschew some multi-homing costs as they draw on modular components in product development."

Developer firms' experience with the new ecosystem and the extent to which they modularize app development using components like software development kits (SDKs) will surly reduce the multi-homing costs and increased competition amongst platforms.