Author Information : Richard D. Wang (Babson College)
Cameron D. Miller (Whitman School of Management, Syracuse University)
Year of Publication : Strategic Management Journal (2019)
Summary of Findings : Companies can leverage product-offering decisions to successfully manage value creation and capture when engaging in a relationship with a platform or channel operator.
Research Questions : We examine how complementors manage value creation and value capture in their interactions with a partner that benefits from network effects.
What we know : Digital platforms can create value for content suppliers by allowing them to reach new customers and by lowering their costs of sales. We typically expect that as a new transactional platform or sales channel arises, all else equal, content suppliers will want to push their products through the channel. Therefore, given the value creation opportunity provided by a digital channel and typical firm behavior, we would expect that content suppliers would fully engage. In our context, this would mean that publishers would push all their products across Amazon Kindle.
Novel Findings : We posit that a tension between value creation and value appropriation may exist when a content supplier enters a relationship with a partner, like a digital platform or sales channel, which benefits from network effects. When engaging with a new platform, a content supplier, by providing quality content, will feed into the network effects—i.e., the content supplier’s products will draw consumers to the platform, which in turn will draw additional content suppliers, which will draw additional consumers, and so on. This feedback loop can make the platform successful, but it can pull sales volume away from alternative channels. If these alternative channels become compromised, the content supplier’s bargain power vis-à-vis the focal platform may be diminished. So how do content suppliers manage the value creation – value appropriation tension?
We examine publishers’ actions in the early years of Amazon Kindle. According to expectations, we find that publishers tend to take advantage of the variable costs saving by offing content in high demand categories. However, publishers tend to withhold some of their most important and valuable content from Kindle. Doing so helps preserve the viability of their outside option (i.e., physical book channels), and thereby enhance their bargaining position vis-à-vis Amazon Kindle. We also find that relative to small publishers, larger publishers, who are better positioned in the physical channel and that have higher quality content, are more likely to use this strategy.
Implications for Practice : Many firms want to engage with digital platforms. These findings improve our understanding of how companies can leverage their product portfolios to both benefit from digital technology efficiencies and maintain their bargaining power vis-à-vis digital platforms. Our findings on publishers managing their engagements in both the physical and the digital ecosystems are indicative of the business challenges as well as the opportunities many complementors face today.
Implications for Policy: There is growing concern among some politicians that technology companies, specifically ones running very successful platforms, have too much power. We detail a source of the power—strong network effects that end up reducing the viability of alternative sales channels. Not surprisingly, content suppliers will typically be worse off if there is not competition in the downstream distribution channels.
Implications on Research: Whereas prior research tends to study platforms that have considerable power over their complementors, we highlight complementors’ engagements in multiple distinct ecosystems—in our contest, both a digital platform and physical channel—as a source of bargaining power for the complementors. We also highlight factors, such as opportunity costs and access to outside options, that explain some of the variation in complementors’ product strategies. From the perspective of the complementor – platform relationship, our findings hint at a scenario when value creation activities might stall—when both the platform and the complementors have comparable bargaining powers over the value they jointly create.
Full Citations : Richard D. Wang & Cameron D. Miller. “Complementors’ Engagement in an Ecosystem: A Study of Publishers’ e-Book Offerings on Amazon Kindle,” Strategic Management Journal,forthcoming. DOI:10.1002/smj.3076
Abstract : In ecosystems, tensions between value creation and appropriation can arise when complementors form relationships with a partner that benefits from network effects. While creating value collectively, these relationships strengthen the network effects, which increase the partner’s ability to appropriate value. We posit that complementors strategize their product offerings to benefit from the relationship with the partner while preserving bargaining power by keeping relationships with other partners as outside options. We examine book publishers’ product portfolios in the Amazon Kindle e-book and the printed book ecosystems. Our results illuminate specific product offering decisions by large publishers that are more protective of the printed book ecosystem and less conducive to Kindle’s success. This research adds to the literature on interorganizational relationships, platform ecosystems, and managing digital innovations.
Companies can leverage product-offering decisions to successfully manage value creation and capture when engaging in a relationship with a platform or channel operator.