The Laws of Platform Economics

The economic evolution of computing platforms appears to be guided by a number of ‘Laws’ that are independent of any specific underlying technology. These ‘Laws’ help explain the evolutionary trajectory of mature platforms and can act as a predictor for the trajectory of emerging platforms and behaviors of those that control them.

The first three laws of platform economics are: Value always migrates up the stack, Value gets integrated over time, Those that control platform evolution get to define how value is extracted. A definition of each of the ‘Laws’ is provided below:

First Law – Value always migrates up the stack – Value creating functionality which starts off embedded in silicon or hardware functionality will eventually migrate to software. As a platform matures value will be driven by software functionality that is increasingly abstracted from any specific underlying physical implementation. The canonical example of this law is the networking stack: Highly specialized network routing silicon gives way to specialized router operating systems which eventually give way to software defined networking layers in cloud computing fabrics.

Second Law – Value gets integrated over time – Functionality which adds value to computing platforms will – if it initially sits outside the control of those that develop the platform – be integrated into the platform. The greater the economic value the more likely that external functions will get absorbed and integrated. In the early days of Microsoft’s Windows platform many valuable functions were provided by 3rd party software – TCP/IP networking protocols, memory managers and anti-virus software to name three examples. Over time these functions were integrated to further enhance the value of the platform.

Third Law – Those that control platform evolution get to define how value is extracted – In other words the owner/developer of a platform will always act in a way that enhances the platform’s primary driver of economic value. Google will always make platform decisions that enhance its digital advertising based revenue model. The functionality of iOS will evolve to enhance Apples ability sell hardware and to extract value from consumers use of services and consumption of media. Microsoft chooses to implement ‘Do Not Track’ by default in IE 10 to both undermine Google’s advertising based business model and to enhance the attractiveness of Microsoft’s new device and services business model. Red Hat is the only open source platform company generating more than $1Billion in revenue per year.