Home' Technology Review : July August 2014 Contents 73
MIT TECHNOLOGY REVIEW
BUSINESS REPORT — THE INTERNET OF THINGS
ers connect to it, together with a gover-
nance model, which is the rules of who
gets what. Business platforms are often
engaged in consummating a match. It’s
a match between riders and drivers with
Uber. It’s between travelers and spare
capacity of guest rooms in Airbnb.
Is connecting ordinary objects, like
toasters, to the Internet going to trigger
Absolutely, yes. But you can’t stop at
the connectivity. The technologist’s mis-
take is often to stop simply at the stan-
dards, the connections. You also have
to add the reasons for other people to
add value. That often means allowing
recombination of features in ways that
you, the original designer, just cannot
anticipate. People have combined the
functions of the iPhone into hundreds of
thousands of apps that Apple never even
conceived of. That is also what the Inter-
net of things enables if you design it in
the right way.
What’s an example of this happening?
Philips Lighting just called me. They
are adding a series of APIs to their LED
lights so anyone can create millions of
colors, create romantic mood apps or
the colors of a sunset from one of your
favorite trips. You can change the lights
in your study in conjunction with the
stock market conditions. That is the
Internet of things, and they’re opening
it to anyone.
Do product companies have a difficult
time making this kind of transition?
They have a really difficult time with
the mental models. It’s fascinating.
Most companies compete by adding
new features to products. They haven’t
been in the business of thinking of how
to add new communities or network
effects. One of the points I make is that
platform business models are like play-
ing 3-D chess.
You estimate that half the top 20 com-
panies in the world, like Google, own
platforms. Why are they winning?
There is a strong argument that plat-
forms beat products every time. Think
of how the iPhone is absorbing the fea-
tures of the voice recorder, the calcula-
tor, and game consoles. The reason for
this is that as a stand-alone product,
you’re going to have a certain pace of
innovation. But if you have opened
your product so that third parties can
add value, and you have designed the
rules of the ecosystem such that they
want to, your innovation curve is going
to be faster.
To me this means there are huge
opportunities to take away business
from existing players in all different
kinds of goods. Or for existing players
to expand their markets if they are pay-
What are some of the next areas for
It’s where you see connectivity is coming
in. Cities, health care, education, elec-
What are the biggest challenges?
In many cases, the governance mod-
els have not been established. For
instance, population density can be
determined by mobile-phone distri-
bution. A telecom company owns that
data. How do you motivate them to
share it? All these sensors are captur-
ing data, but how do you divide the
value? Those are the rules that need
to be worked out, and that’s the miss-
ing piece of most of these discussions
about the Internet of things. You have
to build economic incentives around it,
not simply connectivity.
of the Internet
As everyday objects get connected,
brace yourself for network effects, says
● Product companies compete by build-
ing ever bigger factories to turn out ever
cheaper widgets. But a very different
sort of economics comes into play when
those widgets start to communicate. It’s
called the network effect—when each new
user of a product makes its value higher.
Think of the telephone a century ago.
The greater the number of people who
used Bell’s invention, the more valuable
it became to all of them. The telephone
became a platform for countless new busi-
nesses its inventor never imagined.
Now that more objects are getting
wired up into networks—street lights,
wind turbines, automobiles—there
are opportunities for new platforms to
emerge. That’s why some companies
are seeking the advice of Marshall Van
Alstyne, a business professor at Boston
University who has studied the econom-
ics of e-mail spam and social networks.
These days, Van Alstyne studies “plat-
form economics,” or why companies such
as Uber, Apple, and Amazon are so suc-
cessful—and what traditional product
makers can do to emulate them. MIT
Technology Review’s senior editor for
business, Antonio Regalado, visited Van
Alstyne at his office in Boston.
How can I tell if a business is a platform?
If you produce the value, then you are a
classic product company. But there are
new systems where value is being cre-
ated outside the firm, and that’s a plat-
form business. Apple gets 30 percent
of the cut from other people’s innova-
tions in its app store. I define a platform
as a published standard that lets oth-
“Most companies compete by adding new features to
products. They haven’t been in the business of thinking of
how to add new communities or network effects.”
—Marshall Van Alstyne
6/2/14 8:47 AM
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