Chemical Reaction Dynamics as a Model for Technology Platform Competition

In various corporate meeting rooms at Samsung, Microsoft, HP, RIM and Google eager teams of engineers, marketing folks and freshly minted MBAs are trying to figure out the magic formula which will deliver a product to compete with Apple’s iPad. Hopefully they were all paying attention in high-school because the first steps to understanding the dynamics of this type of platform competition were almost certainly covered in chemistry class.

It turns out that the field of chemical reaction dynamics provides a rather neat model which explains why Apple’s competitors are finding it so hard to gain traction against the iPad. Indeed this abstract model is generally applicable to all situations where an existing product is being challenged by new entrants.

Chemical Reaction Dynamics

The progress of many chemical reactions can be illustrated by a potential energy diagram such as the one shown below.

http://en.wikipedia.org/wiki/Activation_energy

In chemistry terms X&Y represent states of equilibrium. X is the starting point and Y is the end of a chemical reaction pathway. The interesting part of this model is the peak in the middle which can be viewed as an «Activation Barrier» which needs to be overcome to move from one state to the next i. e for the chemical reaction to proceed. The height of this barrier defines the amount of «Activation Energy» required to initiate the chemical reaction.

A common example would be the striking of a match. The un-struck match sitting in its matchbox is represented by state X in the diagram. However, when you draw a — non-safety — match across a rough surface the heat from friction provides enough activation energy to initiate the chemical combustion of the phosphorous in the match head. Resulting in a transition from state X — un-combusted phosphorous — to state Y: the burnt match and the by-products of phosphorus combustion.

The model also illustrates the role of catalysts in promoting chemical reactions. Catalysts act to reduce the amount of «Activation Energy» required for the reaction to proceed i.e. they lower the «Activation Barrier». How they do this is irrelevant for this discussion but the concept and role of a «Catalyst» is critical to the model when applied to the economics of platform competition as will be shown below.

Applying The Model to The Economics of Platform Competition

The chemical reaction dynamics model can be applied to the economics of platform competition. In this case state X represents the iPads current dominant position in the market for tablet devices. State Y represents a future market state that could take many forms. State Y might represent and situation where the market has both grown in size but where Apple’s competitors have also established defensible and sustainable positions. Another state Y' might see the iPad being overthrown completely and some other vendor’s product establishing its own dominant position. In yet another state Y'' tablets themselves may — as some have predicted — become irrelevant with consumers preferring a different form factor or device configuration altogether.

Each of the potential future states of the market for tablets requires a transition from state X — the reality of today — to some future state Y. What is clear is that in each case the «Activation Energy» required to initiate each of the transitions outlined above would be different. The transition from X->Y will require less «Activation Energy» than a transition from X->Y' or even X->Y''. In chemistry the height of the «Activation Barrier» is determined by a a few well defined factors; most notably the strength of the chemical bonds which need to be broken in order for the reaction to proceed.

When applying the model to the economics of platform competition there are a more complex series of factors which affect the height of this potential barrier. Incumbents who are trying to maintain the current state must act to increase the size of the «Activation Barrier» i.e. to ensure that competitors must expend more «Energy» — marketing, R&D, sales effort etc. — to climb accomplish their goals. Competitors on the other hand must be able to provide the «Activation Energy» required to overcome the incumbents established position. Alternatively — and most importantly — competitors must try to find a «Catalyst» which dramatically lowers the «Activation Barrier» and provides the opportunity for a state transition to take place.

A Real World Example: The Tech World vs. Apple

Applying the model specifically to the iPad scenario the various factors at play to both maintain — or increase the «Activation Barrier» or to lower it can be summarized as follows.

Incumbent: Apple — Raising «Activation Barrier»

  1. Delivering Ease of use
  2. Touch technology*
  3. Consistent quality of end-user experience*
  4. Integrated end-to-end services (iTunes)
  5. Depth and breadth of application ecosystem
  6. Seamless integration with iCloud
  7. Retail experience
  8. Purchasing preference inertia

Competitors: Samsung, HP, Microsoft, Google, RIM — Overcoming the «Activation Barrier»

  1. Investing in broad-reach marketing (Samsung)
  2. Multi-channel distribution (All)
  3. User device choice and multi-OEM distribution (Microsoft)
  4. Operating System Innovation (HP & Microsoft & RIM)
  5. Enhanced usability — User Interface Innovation (Microsoft & HP)
  6. Free (Google)*
  7. Open Ecosystem (Google)*

* «Catalytic»

For Apple the set of actions embodied in items 1−6 above have placed them in an enviable — and dominant — market position. The combined effect of these actions together with this market position lead to item 7 on the list — purchasing preference inertia. Word of mouth and customer satisfaction make the iPad the device to buy. In the eyes of many consumers you would be stupid not to. Its is perhaps this factor that has the greatest long-term influence on the height of the «Activation Barrier» surrounding Apple’s iPad.

As mentioned above, catalysts play a critical role in promoting many important chemical reactions. The same is true in the economics of platform competition. The iPad is a derivative of the original iPhone and that device overcame an established market state to achieve its current position. Before the launch of iPhone, Apple was playing the role of competitor trying to find ways to lower the «Activation Barrier» raised by Nokia, RIM, and Microsoft in the smartphone market. For Apple, new «Touch Screen» technology combined with an integrated end-user experience was the «Catalyst» which effectively lowered the «Activation Barrier» maintained by these incumbents. The obvious effectiveness of that «Catalyst» is seen in Apple’s market position today. Apple competitors must now find a new «Catalyst» which will enable them to accomplish the same feat.

From the list of competitor actions outlined above very few of them are likely to be «Catalytic». The one exception is Google’s decision to use an open development model for its Android operating system and then to make that free to the mobile device OEMs and carriers. «Free» and «Open» are well established «Catalysts» that have proven effective in reducing the «Activation Barrier» across sectors of the technology market. The only problem with this approach is then being able to build a sustainable «Equilibrium» business model once the transition from one market state to the other has taken place. In Google’s situation they are able to do this because the «Free» offer is underwritten by their very profitable digital advertising business. Clearly not all of Apple’s competitors can afford to implement that strategy.

Implications for Microsoft’s Tablet and Smartphone Strategies

Its is difficult to imagine that any of the other items in the list of competitor actions (1−5) can be seen as «Catalytic». Microsoft is clearly hoping that items 4 & 5 will act as «Catalysts». However, the lack of market traction for Windows Phone 7 and its new «Metro» user interface — and underlying operating system — has clearly not had a «Catalytic» effect in the smartphone market. For this reason it is difficult to see why the result will be any different when the company introduces its tablet optimized version of Windows 8 along with its brand new touch interface.

The market has already been pretty clear that shiny new interfaces are not enough — on their own — to overcome the «Activation Barrier» Apple has erected around the iPad and iPhone. Of course the combined effect of items 1−5 when implemented and supported by Microsoft’s vast resources will almost certainly help it establish a defensible position for Windows 8 tablets. The Windows franchise is one of the three money making engines for the company so Microsoft can afford to put a lot more «Energy» into overcoming any obstacles in its way. However, without a «Catalyst» it is hard to see how Microsoft will achieve the level competitive success it is clearly hoping for. Microsoft should be focused on finding that «Catalyst»

One common category of «Catalyst» is a step change — or breakthrough — in some core technology. As outlined above Apple leveraged the recent availability of «Capacitive Touch» technology to «Catalyze» the success of the iPhone, iPod Touch and then iPad. In the same market Nokia used the change from analog to digital mobile communications as a «Catalyst» and was highly effective at reducing the «Activation Barrier» around companies like Motorola and Ericsson.

Microsoft already has a highly «Catalytic» technology breakthrough in its hands. The introduction of Kinect for XBox — which enables gesture based remote interaction with games — has revolutionized the gaming market. Kinect quickly became one of the fastest and best selling pieces of technology of all time. Bringing Kinect to the PC would render current touch technology redundant very quickly. If Microsoft integrates Kinect technology as a standard platform feature of Windows 8 PCs and tablets then they may very well have found the «Catalyst» needed to overcome iPads dominant and seemingly insurmountable «Activation Barrier».

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