1. Competition among Multi-Sided Platforms David S. Evans LECG and University College London 7 June 2007 2 nd Lear Conference on the Economics of Competition Law Rome, Italy

2. 2 Multi-Sided Platforms: Powerbrokers In The Global Economy

3. 3 Today’s Discussion The Nature Of Competition The Digital Music Business 5 3 1 When Do Multi-Sided Platforms Compete? Search-Based Advertising 4 2 The Catalyst Age 6 What Is A Multi-Sided Platform?

5. 5 The Birth Of The Charge Card  Merchants paid 7% fee  Cardholders paid small fee roughly equal to the value of the float  Profits entirely from the merchant side

6. 6 Catalytic Reaction For Charge Cards 330 restaurants and 42,000 consumers one year later 14 restaurants and 200 consumers to start Card system signed up merchants to accept and consumers to use cards: a three-party system

7. 7 What Makes A Platform Multi-Sided Reduces transactions costs between two or more groups of economic agents ► ► Significant indirect network effects between groups ► ► Uses pricing, design, and openness to optimize positive feedback effects ► ►

8. When Do Multi-Sided Platforms Compete?

9. 9 How Many Multi-Sided Platforms Compete CauseEffect on Size/Concentration Indirect network effects + Scale economies + Congestion – Platform differentiation – Multi-homing –

10. 10 Core Functions Of Multi-Sided Platforms MatchmakersAudience buildersCost minimizers Objective To facilitate transactions Objective To assemble eyeballs Objective To increase efficiency eBayParis MatchPalm OS Yahoo! PersonalsGoogleWindows Marché BastilleCondé NastSymbian MySpace.comTiVoSony PlayStation Manheim Auto Auction Reed ElsevierXbox OdaibaWall Street JournalSAP enterprise software NASDAQBBCLinux

11. The Nature Of Competition

12. 12 Side A Platform 0 Side B Side A Platform 1 Side B Side A Side B Platform 3 Side A Side B Platform 2 Side C Single-SidedSymmetric Two-SidedThree-Sided 00 ++ 0 0 + Competition When The Number Of Sides Vary

13. Search-Based Advertising

14. 14 The Search-Based Advertising Business Share of Search-based Advertising Revenue Share of Searches

15. 15 Search Pages

16. 16 How Bidding Works Price goes up with scale because a platform with more advertisers:  has greater likelihood of having advertisers who value a search highly  has more competition among advertisers for valuable searches  clicks go up with scale—platform has the right ads to deliver to searchers Revenue Per Search (RPS) = Price per click * Clicks per search

17. The Digital Music Business

18. 18 iTunes-iPod Business Model Music Publishers (Protected music) iTunes iPod Consumers Unprotected Music CDsMP3s

19. 19 Growth In iPod And iTunes Source: Apple Corporation, Form 10K and Annual Reports, various years. Number of iPods shipped (millions)Number of iTunes sold (millions)

20. The Catalyst Age

21. 21 Three Factors Will Lead To More Catalysts The web is a convenient meeting place 1 2 3 It is easy and cheap to communicate Software platforms power many catalysts

22. 22 The Catalyst Age And Competition Policy More dominant firms in sectors as multi-sided platforms form and grow ► ► More dominant firms as high-tech, multi-sided platforms displace low-tech ► ► More consolidations as multi-sided platforms seek demand and cost-scale economies made possible by technology ► ►

23. 23 Thank you! david_evans@lecg.com www.lecgcp.com Catalyst Code: The Strategies Behind The World’s Most Dynamic Companies David S. Evans and Richard Schmalensee Harvard Business School Press, May 2007 www.catalystcode.com Catalyst Code: The Strategies Behind The World’s Most Dynamic Companies David S. Evans and Richard Schmalensee Harvard Business School Press, May 2007 www.catalystcode.com Invisible Engines: How Software Platforms Drive Innovation and Transform Industries David S. Evans, Andrei Hagiu and Richard Schmalensee MIT Press, 2007 Invisible Engines: How Software Platforms Drive Innovation and Transform Industries David S. Evans, Andrei Hagiu and Richard Schmalensee MIT Press, 2007