The Agenda

The App Economy and Open Services Innovation

Michael Mandel of the Progressive Policy Institute estimates that the universe of software development for the iOS, Facebook, and Android platforms “is responsible for roughly 466,000 jobs in the United States.” Last fall, a University of Maryland study attributed 182,000 new jobs to the Facebook App economy, which reminded me at the time of Henry Chesbrough’s argument in Open Services Innovation: “innovating in services is the escape route from the commodity trap.”

strategy + business published a detailed discussion of Chesbrough’s views last year:

Now Chesbrough argues that the fortunes of advanced companies — and of economies as a whole — will depend on how well they rethink services. His analysis began several years ago as he considered the fact that service-based industries were rapidly supplanting manufacturing-based industries — in developed economies in general, and in the U.S. economy in particular. Today, he points out, services account for roughly 60 percent of economic activity in the top 40 world economies, and fully 80 percent in the United States.

Services, in this context, doesn’t mean such small-scale activities as providing haircuts or washing cars — or even conventional large-scale services such as accounting and retail businesses. Instead, Chesbrough has a vision of knowledge-intensive infrastructure and product lines that evolve into “the engine of growth for the entire developed world.” Breaking out of the old manufacturing-based, product-centric mold, Chesbrough says, will be challenging for business leaders, because it requires them to think of their customers not as purchasers of goods, but as co-creating partners in an evolving relationship. Companies that master new service innovation models and build or add the requisite new capabilities, he promises, will be able “to reach levels of success they have never before experienced in their market or their industry.”

But what exactly does this mean? The most successful firms manage to create open platforms that other firms can build on — instead of relying solely on in-house talent, you can draw on the entrepreneurial energy of thousands and potentially millions of people you’d never dream of hiring, who will dream up new ways of deploying your product that you might have never anticipated.

I trace the evolution of the cell phone in some detail in the book as one illustration. Commoditization is why Motorola had difficulties earlier on and Nokia is having them today. Today you have handsets coming from companies like HTC in Taiwan, and Samsung and LG in Korea, and many others, and you can imagine there will be handsets coming out of China and other places. Everybody understands how to do total quality management, enterprise resource planning, and all the methodologies of Six Sigma, so the things that let companies differentiate themselves and make better products have now become very widely distributed. It makes it harder and harder to sustain a good margin if you’re not simultaneously providing opportunities to wrap experiences around the products that you’re making. And these don’t have to be your own services, either; they can be others’.

If you look at the iPhone, iTunes, iPad — the whole “i” empire that Apple has built — they haven’t done it alone. They’ve done it with hundreds or thousands of apps makers alongside them, much as Microsoft did with Windows in the 1980s and ’90s, when they had, at one point, something like 75,000 independent software vendors working on Windows.

That’s the way products become platforms, and I think that’s where companies of all kinds need to end up, so that they’re not just making a product or a providing a simple service. The right way to think about it is, “How do I turn what I have into a platform?” And a platform, on the one hand, attracts others to build alongside and on top of what you’re doing, but on the other hand allows you to provide a much wider set of experiences.

This idea of building platforms sounds very attractive. The iOS platform has enabled, among many other things, wonderful new services like Uber, a paradigmatic example of a service that exploits a regulatory loophole (as Matt Yglesias has observed) to offer an alternative to underperforming taxis.  

Platforms like iOS are a subset of general purpose computing. One potential danger we face is that the “appliancization of the Internet,” which Jonathan Zittrain has written of ominously, will actually undermine the generative or creative potential of new technologies. That is, the emergence of iOS as a technological “walled garden” might shunt the development of software applications into this hyper-controlled direction. Android represents an alternative to this approach, as Google exerts no real control over Android apps. This, of course, also means that the Android experience is somewhat more fragmented than the iOS experience, which might redound to the benefit of iOS.

As Cory Doctorow has suggested, politicians and regulators don’t understand general-purpose devices very well, and in some sense they fear them. The idea of a perfectly benign device being engineered into a weapon of piracy or war is genuinely discomfiting. And so tightly constrained platforms represent in some sense a more attractive alternative to the authorities — regulators effectively deputize Apple to police its iOS walled garden. But these tightly constrained platforms are less likely to generate true breakthroughs than truly open platforms.

To return to Chesbrough for a moment, one wonders which is the more attractive business proposition: a carefully cultivated walled garden or the looser Android approach? The latter, in the short term at least, presents less in the way of profit-making potential, as rivals can take the Android OS and fragment it. Indeed, Charles Kindel has argued that Google has already lost control of Android. That might be a good thing for the world. But is it a good thing for Google and Google’s shareholders? I don’t think the answer is obviously no. Creating a real alternative to iOS might prove useful for Google in the long-term. As Mandel’s report and Chesbrough suggest, the goal of creating an open platform is to capture a good-sized slice of an enormously expanding pie. Apple’s slice of the iOS pie will almost certainly be bigger than Google’s slice of the Android OS pie. But that might not matter so much if the Android pie grows to be truly enormous.

Reihan Salam is president of the Manhattan Institute and a contributing editor of National Review.

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