Milestone Group Quarterly: July 2008

Articles

• Face to Face: Jimmy Wales, Founder, Wikipedia.org
• Investment Viewpoint: Evangelos Simoudis, Managing Director, Trident Capital
• By Invitation: The Web's Dark Energy, Community policing can help make the Web safe by Jonathan Zittrain  
• Milestone POV: The Ecosystem Wars and the Zero-Sum Game by Mark Zawacki, Milestone Group Founder & Managing Partner

Milestone POV: The Ecosystem Wars and the Zero-Sum Game by Mark Zawacki, Milestone Group Founder & Managing Partner

Technology-based market leaders strive to create vibrant ecosystems around their core products – and the logic behind this is reasonably straightforward. First, an (eco)systematic approach can significantly enlarge the market by fostering co-operation among third parties, who then build complementary products and services around the core offering. Second, it often stimulates a lock-in effect where buyers ‘stick’ to products (i.e., inasmuch that the products become proprietary or otherwise difficult to dislodge). Third, the inertia effect found as returns increase can scale and grow the ecosystem to a point where it attracts more participants, thus fueling market momentum.
 

Creating large viable ecosystems is simply good business for most technology-based market companies. In 1990, less than 10 percent of annual revenues of the 100 largest technology companies were earned through alliances and ecosystems. By 2005, that number mushroomed to 40 percent. Today, partner-savvy technology companies derive more than 90% of annual revenues via alliances, partnerships and other ecosystem-related activity.

With that, we’re beginning to witness what we might call ‘Ecosystem Wars’, characterized by several large incumbents fighting over the same third-party participants, and pursuing a zero-sum game.  Recent events bear this out, as in:

• The Microsoft/Google/Salesforce.com cloud fight.
• Apple’s iPhone and Android (Open Handset Alliance, championed by Google) are vying to both become a leading standard for next generation mobile phone operating systems.
• Microsoft (.NET), SAP (NetWeaver), IBM (WebSphere) and Oracle (Fusion) are all at battle for the hearts and minds of companies attempting to figure out how all the various corporate software pieces fit together (so called ‘application integration’).
• Facebook and other social networking platforms are all currently courting third party developers at a frenzied pace.

What’s unique about the current Ecosystem Wars can be best understood from the small startup’s perspective. The typical startup has limited resources to apply to technical development (alas, the zero sum game). And they cannot contribute to multiple ecosystems, simply due to varying technical standards and development required in a multi-system environment.

Shifting from a Zero-sum Approach
 

Startups need to weigh up the risk/rewards of joining various ecosystems. The promised rewards are often known.  These include: adding a name brand partner logo on marketing materials; increasing market reach by co-marketing and co-selling; increasing corporate visibility for a potential exit. Often overlooked are the costs and risks of participating in an ecosystem while, at the same time, ignoring the opportunity cost of not participating in others.

Typically the mistake made is a cost benefit analysis consists of quantifying the costs of participating in a partner program (for example with SAP), without equal attention to the impact of not participating similar programs (e.g., IBM or Oracle).  It’s the very analysis of not looking at the opportunity costs of other viable ecosystem options that trips up so many startups.  Remember, you need to go slow to go fast.

Ecosystem Wars promise to rage across the technology, media and telecommunications landscapes for some time. And as is the case with any battle, planning consists of understanding the trade-offs among different approaches. And what it will cost to commit to any of them?

Mark is Managing Partner and Founder of Milestone Group. He has worked with more than 50 tech, media and Telco companies globally on a myriad of growth and revenue-related issues, including strategic positioning, business and corporate development, alliances/partnering and international expansion. His clients have included Microsoft, Cisco, Swisscom, SAP, Trend Micro, Avocent, Vignette, MX Logic, Phoenix Technologies, Ditech Networks, Ramco Systems, Persistent Systems, PGP, BigFix, Talend, Koral (acquired by Salesforce.com), PlaceWare (acquired by Microsoft), AvantGo (acquired by Sybase), Xcalia (acquired by Progress Software) and Identum (acquired by Trend Micro).