So you want to build an ecosystem?

Uber is grossly overvalued, a colleague claimed recently. It’s just an App, isn’t it? It’s more than that, it’s an ecosystem – read on to find out why, and how to establish an ecosystem.

Uber is grossly overvalued, a colleague claimed recently. It’s just an App, isn’t it? It’s more than that, it’s an ecosystem with clients, drivers, a company linking them, a reputation, and possibly regulation (or absence thereof). It’s a business model, profitable and scalable. Companies who succeed nowadays to create a profitable ecosystem often enjoy very good valuations.

I think this reflects how hard it is to get started, and how much the successful company can benefit from the network effect (basically, a large network is attractive and gets larger).  To begin with, Uber had to convince some drivers and some customers to start using the service. But it was easy for the drivers and clients to try the new service, no big upfront investment  was required.

B-B-C, in the middle you wanna be

The abbreviations B for Business and C or Consumer became popular in the first Internet boom (after the year 2000 problem has been resolved and ICT was looking for a new hype). Stranded together as B-B, it means that a business supplies to another business, while B-C is the typical consumer (retail) business. C-B-C is a business facilitating interaction between consumers (e.g., auctions). The middle B in B-B-C brings businesses and  consumers together – this is indeed the case of Uber, the outer B are the drivers, the C are their clients.

Scaling is easier in the middle than on the left – you need no car, no drivers, just marketing and IT (for scaling the ICT, use the cloud). The hard part is to establish yourself in the middle, because – up front – nobody needs you, nobody wants you, nobody even knows you (unless you’re established already elsewhere).

Soft only for scalability

Amazon has to stock and process every item it ships on its own. This is a massive investment, and limits scaling. Because the selection is so big nowadays, it is easier for them to attract outside shops to use their platform (for a fee). Therefore,  for much of their business, the costly part is handled by third parties, and they are enjoying the benefits of being in the middle of B-B-C.

Questions to ask

You are the C in B-B-C. You, everybody you know, and all the people in your company are potential consumers. Would they all crave for such a service, if somebody would jump into the middle to provide it? How far would they go for it? How much would they pay?

Would the companies providing the service see benefit? Losing a direct customer contact can be viewed as a threat. What is in for them? Can they reach a wider audience? Does a business become feasible that otherwise wouldn’t? Are there gross inefficiencies in the market, or are the clients dissatisfied?

Would they both compete and cooperate with another company providing a service (coopetition)?

Could you take out some pains the service companies are facing? For example, economies of scale (think of a small pool of taxis maintaining a call center) or regulation (as you provide less than the whole value chain, regulators may be less interested).

Finally, how can you arrange the business so that the costs of entry into your network are small, but the benefit of staying in the network remains high?

For starters, sales people have nothing to sell

Traditional sales people need to have something to sell – this is difficult if you try to build a network. How many clients are connected to an App, asks the driver? How many drivers are available, asks the passenger? Apple invented the term Technology Evangelist , or simply Evangelist.  Ambassador sounds less religious, and may be more acceptable in other cultures.

Devise a strategy: Do you convince the C side first (if you can provide some features that don’t require the B side). Or do you have to find at least one B side partner to get started? Or do you want to tackle the B side first, convincing them that consumers will follow for sure?  Or can you afford to grow slowly, business by business, consumer by consumer, until you reach the tipping point?

Connect to an existing ecosystem

Google Wave was intended to be a great replacement of E-Mail, usable from any browser, and an entirely new way to collaborate. It failed to get traction – perhaps because it was aiming too high, but also because it didn’t interoperate with the huge ecosystem of E-Mail. Hence, the initial investment for most potential users was too high, as they couldn’t reach out to the huge network on E-Mail.

Google tried again with Google+, with little initial success, but then started to integrate Google+ with many other products. Nowadays, whenever you use a Google product, Google+ is not far away, and it’s somewhat hard to be sure whether one is actually using Google+ or just a service based on it.

So ideally, put a bridge out to something that has a strong user base, and connect to it.

Don’t leave the majority behind

You might fancy a certain technology or innovation, and perhaps even think of it as critical for your ecosystem. Think again. Do you really want to exclude the potential clients who don’t have access to that technology or who don’t want to use a particular way of doing things? How many clients would Uber have if it insisted on Bitcoin as its sole means of paying a driver?

Or if you fancy a feature in the latest version of Android: Is it really necessary for your App? Even if it is, build bridges for the majority that hasn’t kept up, or for those of us that aren’t even on Android.

Embrace Open Source: D-O-X

Open Source endeavors build an ecosystem: An Organization (or an individual, or a company), the O in the middle)  organizes contributions by developers (D on the left), and businesses or consumers (hence X) on the right. Most of the considerations outlined above apply here as well – a large number of users attract many developers, and vice versa.

“Same same but different”

If there is an existing ecosystem, it is hard to replace it, unless the replacement is vastly superior. There were many file sharing solutions before, but Dropbox changed the game because of their superior ease of use (ther’re using Python, so they could move fast…).

With open source ecosystems, competition is different: If you have a good idea, you don’t need to start from scratch – you can join an existing effort. This leads to “organic” improvements, which could be an economic advantage of open source solutions.


 

I’m an ICT person, not an economist. But ICT doesn’t stop with technology. If you’re an economist, how would you tackle the path to a successful ecosystem? Any hints or recipes? Or good or bad experiences?