We all know Google Inc. The company, founded in 1998, started off as a simple search engine company. Today, it is the foundation for navigating the Internet.
How did Google succeed? First, it improved on an essential problem: how to find anything among the millions of Web sites out there. Not only did it improve the search function, it also distributed its technology—in the form of an embedded toolbar—to Web site developers and users, which made connecting to and developing upon it easy.
But where Google really won the battle to be the leading Internet search site was on its business side. The company figured out how to make money from the Internet, linking focused advertising to user searches. In effect, it revolutionized the advertising business. And now, Google's market value is over $200 billion—many times that of the largest advertising agencies.
Google is an example of an industry platform—which is to say it's a foundation technology or service essential for a broader ecosystem of businesses. A platform requires complementary innovations to be useful. It's not under its originator's full control, even if it contains certain proprietary elements.
Platforms exist in many industries. New energy sources, such as hydrogen fuel cells or hybrid gasoline-electric systems, may become platforms for powering a variety of devices. Banks, credit card companies and Internet service companies are all competing to develop a platform for micropayments and other specialized financial services. Pharmaceuticals develop compounds that become the basis for several different drugs that they or partner companies make.
Platforms open the systems they operate in to new usage possibilities. These different uses are essential for growth, but who will develop them? And how can those who want to become platform leaders successfully encourage other companies to join their ecosystems and develop essential complementary applications?
Companies must create economic incentives for other companies that they want to create complementary innovations. But they must also protect their own abilities to profit from the innovations. It becomes a balancing act—protecting profit sources while enabling those creating applications to also be profitable and protect their proprietary knowledge. In fact, it's the greatest challenge to platform leadership, and while there's no simple framework for accomplishing it, looking at a successful platform leader can be illuminating.
Consider Qualcomm Inc. It became a platform leader first by addressing an essential technological problem in its industry. The company started out designing communications technologies for satellites and military applications in the 1980s and went on to establish its proprietary wireless communications technology as a platform for the cellular phone industry.
In the late 1980s and early 1990s, wireless cell phone technologies were often incompatible and inefficient—a problem that hurt telecom operators and handset manufacturers as well. Qualcomm solved this problem by inventing a technology that breaks phone calls into small bits and then reassembles them, much as the Internet does with data packets. Key industry players such as AT&T (later Lucent) and Motorola licensed Qualcomm's technology.
For the company to succeed, it needed to make it easy for other companies to connect to and build upon its technology. So, to facilitate third parties adopting the technology, Qualcomm invested in chipset designs embedding its technology. The chipsets were compact integrated circuits and easy to plug inside cell phone handsets. Dozens of companies began using Qualcomm's technology in their cell phones as well as in hundreds of other wireless devices.
In the 2006 fiscal year, Qualcomm reported an astounding net income of $2.5 billion, from selling chipsets as well as licensing its patents. However, being a platform leader is complex. Ecosystems shift. As technologies and markets continue to evolve, Qualcomm's position could weaken. To avoid paying high license fees, European companies led by Nokia Corp. and companies sponsored by the Chinese government have been developing or exploring alternatives to Qualcomm patents.
More information on this topic is available at http://sloanreview.mit.edu/smr/issue/2008/winter/01/