Governance of Ecosystems

[23] Governing Democratized Platform Ecosystems

Kilian Schmück and Nicolas Gilgen

Abstract

Platform ecosystems have been around for a long time. Many of the current highly successful companies such as Amazon, Google, and Facebook have taken advantage of platforms in their meteoric rise. However, centralized data ownership, lock-in effects, and market power of centralized platform owners are increasingly raising questions about regulating monopolistic market structures. The solution to the problem may lie in democratized platform ecosystems. Initiated by a consortium or foundation, democratized platform ecosystems create the underlying infrastructure for fair competition. However, developing, managing, and expanding a platform that ultimately belongs to no one requires sound governance.

Authors

Kilian Schmück is a research assistant and project manager at the Institute of Technology Management at the University of St. Gallen. His research focus lies on democratized platform ecosystems, ecosystem governance, and corresponding incentive mechanisms. He is the initiator of the St. Gallen Blockchain Roundtable, where scientific research on democratized platforms is discussed together with business, academia, and politics. Kilian received his Master of Science at the RWTH Aachen University in Mechanical Engineering.

Nicolas Gilgen is a research associate at the St. Gallen Institute of Management in Asia, the University of St. Gallen's institute in Singapore. His research focuses on innovation in small and medium-sized enterprises. Previously, Nicolas studied Business Innovation and International Management (CEMS) at the University of St. Gallen and Ivey Business School in Canada.

1 Introduction

[24] Platform ecosystems have been around for centuries. The marketplace in the Middle Ages is nothing more than an analog "platform" ecosystem governed by a local authority. New technologies and products such as the PC, the internet, and smartphones enabled the rise of new dominant platform players. Between 1980 and 2000, for example, Microsoft achieved a dominant position by applying a licensing business model and generating and exploiting network effects. Amazon, founded in 1994, leveraged the then largely untapped potential of e-commerce to become one of the most valuable companies in the tech industry today. However, recent headlines about tax evasion, poor working conditions, and data security concerns have cast the tech giants in a bad light. As a result, there are growing voices calling for regulation and new means for value capture mechanisms in platform ecosystems, and even the breaking up of tech monopolies altogether. Indeed, there are several challenges associated with centralized platforms. For example, the rise of digital platform players has led to data monopolies, resulting in a lack of grassroots innovation. One can only imagine what innovations would emerge if pioneering startups had access to the vast amounts of data held by the tech giants. Another example is the subjectively unfair market conditions, such as some ridesharing companies' transaction fees of up to 30 % in some markets, resulting from information asymmetries between the platform owner and users.

But the solution to these problems does not necessarily lie in breaking up platform companies. Digital platforms do offer significant advantages, such as immense efficiency gains and transaction cost reductions. Instead, the solution should lie in a drastic rethinking of how platforms are initiated and managed in the first place. The result is democratized platform ecosystems. By applying and combining appropriate governance models and novel technologies such as blockchain, democratized platform ecosystems open up a new value space for all participants.

As a first step, this chapter takes a closer look at the first governance model of federated platform ecosystems, which has strong similarities to traditional business ecosystems. It then discusses how the second governance model, the one of decentralized platform ecosystems, creates a neutral, underlying technological infrastructure for applications. Finally, the chapter briefly discusses when to choose one or the other.

2 Federated Platform Ecosystems: Initiating Democratized Platform Ecosystems through Consortia

[25] In a business ecosystem, a diverse group of companies comes together to jointly create a new or superior value proposition that could not be achieved by a single company alone. In this sense, a business ecosystem is an interactive, collaborative configuration of business models from a customer journey perspective. A leading company, the orchestrator, orchestrates the configuration of the different business models within a business ecosystem.

Federated platform ecosystems are very similar: several organizations, usually incumbents, join together to solve a specific, cross-industry problem. This could be, for example, putting ownership and management of identity data back into the hands of data creators or making trade finance more automated, efficient, and transparent. For instance, the IDUnion network deploys self-sovereign identity (SSI) technologies and other distributed ledger technologies (DLTs) such as blockchain to create an efficient and secure identity solution for natural persons, legal persons as well as machines. The project is supported by the German Federal Ministry of Economics, and the consortium currently includes the Main Incubator/Commerzbank, Bundesdruckerei, Bosch, the Technical University of Berlin, Deutsche Bahn, BMW, Deutsche Börse, Telekom Innovation Laboratories, the City of Cologne, and Siemens. The goal is to create a digital login like Gmail or Facebook login, but with a decentralized structure, so that the identities themselves remain in the owner's sovereignty. Although these ecosystems are often initiated by a single company that later takes on orchestration, the platform created may not be owned by any one party. Centralized platform ownership would run counter to the very idea of these ecosystems: to create open standards for different solutions and achieve network effects without lock-ins. In such an environment, the best solution wins because interoperability allows users to easily "lift and shift" their data to the preferred provider. This is enabled in no small part by DLTs that are data ledgers shared and maintained by a network of users rather than by a central party. Therefore, DLTs rely on consensus mechanisms that define how consensus on the state of the ledger is reached. By eliminating intermediaries, DLTs solve the aforementioned matters of centralized data ownership, lock-in effects, and the resulting market power of dominant platform owners.

However, in federated platform ecosystems, a fundamental challenge arises: how can organizations be incentivized to invest in creating a platform that they do not ultimately own? Sound governance is needed to solve these [26] game-theoretic challenges. Platform governance can be broadly defined as the configuration of decision rights, accountability, and incentive mechanisms. In federated platform ecosystems, decision-making power is centralized among consortium members who work collaboratively to realize a common goal. Therefore, platform governance is not necessarily openly accessible to external third parties. Rather, access is governed by specific criteria designed to ensure complementarity among the governing consortium members. Accountability is established through traditional means. Contracts, legal entities such as associations and cooperatives, and consortium members' reputations create accountability and trust. This is also necessary because, unlike decentralized platform ecosystems, federated platform ecosystems simply reflect consortium governance in the technology, rather than implementing governance "on-chain," i.e., in DLTs. In terms of incentive mechanisms, each consortium member typically has an internal business case that justifies the organization's investment in the project. For example, banks have an incentive to invest in more efficient data management or trade finance solutions to save significant onboarding and paperwork costs. This is not to say that consortia formation is easy. Because corporate decision-making power is often based on profitability and return on investment considerations, investing in a platform that does not provide direct financial benefits can be challenging to justify internally. There often seems to be a disconnect between incentive mechanisms and business models. Business models contain the value creation mechanisms of a focal company. Thus, they relate to a specific value proposition to effectively satisfy customer needs. New business models with new profit potentials can indeed result from federated platform ecosystems - especially if democratic access to data is enabled. However, due to the early stage of DLTs and democratized platform ecosystems, new business models and revenue streams are still elusive in many cases. Incentive mechanisms, in turn, motivate companies to participate in the development and maintenance of federated platform ecosystems in the first place. Attempting to establish a connection between incentive mechanisms and business models in a company can lead to a chicken-and-egg problem.

3 Decentralized Platform Ecosystems: Initiating Democratized Platform Ecosystems through Non-profit Foundations

[27] Decentralized...