What the Xbox Tells Us About Market Competition

Academics are increasingly studying strategy and competition in markets dominated by "platforms." What's a platform? They are products created to be platforms on top of which other companies can sell products and services.

Cell phones are a platform -- they provided a multi-billion business for ring tone makers. The Windows and Mac operating systems are platforms for independent software providers. If designed and operated correctly, all platform players benefit. It's all very circular. Nintendo benefits by attracting top game companies to its platforms and thus making its product more attractive to customers. The game companies benefit from Nintendo's massive marketing clout.

Researchers love to study platform dynamics. What are key strategies to be employed by platform creators in attracting key development partners? What characteristics lead to platform dominance in a market? What should developers be thinking of before hooking up with a Microsoft or Verizon?

Enter a new research paper by Harvard Business School professor Marco Iansiti and co-author Feng Zhu that looks at the success of Microsoft's Xbox in taking business away from entrenched competitor Sony and its PlayStation 2.

"This paper seeks to answer three questions," the authors report. "First, which drives the success of a platform: installed base, platform quality, or consumer expectations? Second, when does a monopoly emerge in a platform-based market? Finally, when is a platform-based market socially efficient?"

Although fairly technical in nature, the paper is a must read for any business or entrepreneur that is a platform provider or player. One thing you'll learn is how Xbox managed to carve a big business from the hide of its competitors with only a slight technical advantage in its product.