Why It’s All About the Digital Ecosystem

on December 16, 2011

My firm, Creative Strategies, has been talking extensively about what we call the digital ecosystem for over 10 years now. As we have been analyzing the technology industry and the underlying fundamentals that make it work, we have been trying to think about this from the vantage point of ecosystems. We believe that products are better as a part of a solution and in this ecosystem view-point, products are not islands but part of a solution (or ecosystem). This view works in every segment of the market as it is universal.

So what do I mean by digital ecosystem?

Based on the Merriam-Webster definition of an ecosystem I’d like to submit this definition for a “digital ecosystem”.

“the complex of a community of digital devices and their environment functioning as a whole”

A complete digital ecosystem consists of hardware, software, and services. All play a particular role in the ecosystem in order for it to function as a whole. Based on the design of the hardware, the function of the software, and the services provided, ecosystems can target specific parts of the market or the market as a whole. Microsofts’s XBOX is an example of a hardware, software, and services solution targeted for a specific part of the market. The point is that all three components are necessary for a holistic ecosystem.

The important thing about ecosystems is that they create dependencies. These dependencies can lead to consumer loyalty. They, however, can also lead to consumer revolt. Microsoft, Google, and Apple are out to create ecosystems that drive loyalty. In my opinion, companies like Comcast create ecosystems that lead to revolt since I would prefer a better TV service and integrated solution.

Our conviction is that over the course of the next few years, consumers will consciously begin to make decisions about products based on whose ecosystems they desire to be a part of, or the ones that work better for their life or environment. The hardware, software, and services will be important but more importantly, consumers will commit to and invest in ecosystems.

As it relates to personal computing, there are three main companies who enable ecosystems today. They are Microsoft, Google, and Apple. Microsoft and Google are more horizontal, where Apple is more vertical.

The history of the technology industry informs us of a fascinating value shift. This shift begins where value is initially in hardware, then as the market matures it moves to software and then eventually to services. I would argue that this value shift is more significant with horizontal plays than with vertical plays. This is important to keep in mind as we look at each ecosystem.

Microsoft, Google and Apple all think about ecosystems differently, which is why I choose to look at them separately.

The Microsoft Ecosystem
As I pointed out in last weeks column, I believe Microsoft thinks more like an operating system company than a software company. This is not always a bad thing and in this case, thinking in terms of enabling a platform is a good thing. What is important is how that platform enables an ecosystem. Microsoft has been relatively strong as it relates to desktops and notebooks. If you are not Apple and you need to ship an OS for a desktop or notebook, Microsoft is your best choice.

Where Microsoft has been weak with regards to personal computing is in the area of services. This is not to say they don’t or can not think like a services company. In fact XBOX Live is, I believe, the best service for gamers out there hands down.

Microsoft has been strong in enabling hardware and software for PCs but needs to strengthen that strategy as it relates to smartphone and tablets. Microsoft and Google both need to invest in helping those in their hardware and software ecosystem differentiate and make money.

In this new era of truly personal computing, being led by devices like smartphones, and now tablets to a degree, Microsoft is well behind Google.

The Google Ecosystem
Google has been fascinating to watch. I believe that Google, unlike many businesses, thinks first like a services company and then works backwards. What I mean is that while Apple and Microsoft think more from a hardware and or software viewpoint first, Google thinks first and foremost like a services company.

In this mindset, it becomes pretty clear that, unlike other companies in this industry, Google exists to make money for no one else except Google. They may say this is not true but their actions prove that it is. Google wants to extract value from all hardware, while using software (like Android) only as mechanism to connect to their services, which is how they make money.

For Google’s ecosystem to strengthen, they need to figure out how to work better with hardware manufactures in order to create a unified ecosystem AND invest in helping others make money. If they do not do this, their ecosystem becomes unsustainable and could someday be void of life.

The challenge that the horizontal platform strategy brings is that it makes it harder for hardware players in the ecosystem to differentiate. Both Google and Microsoft enable what I call the “sea of sameness.”

In a world where consumer preference and choice is prevalent, a lack of differentiation is the slow kiss of death.

The Apple Ecosystem
Apple on the other hand stands out clearly from the pack due to their vertical approach. By owning and controlling all the major parts of the ecosystem, the hardware, software and services, they are in the drivers seat when it comes to emphasizing value.

I stated the historical observation earlier of how value moves through the ecosystem cycle. I believe, because Apple is vertical, they can keep value in hardware longer–or perhaps indefinitely– where other hardware players in other ecosystems can not.

Unlike Google and Microsoft, Apple doesn’t enable a hardware ecosystem for anyone other than themselves. I view this as a strength, but I know many who view this as a weakness. When it comes to software, although they own and control the OS and a few “core apps,” they do a great job enabling the software community to add value to their ecosystem.

Apple is strong in hardware and software but like Microsoft they need to get better at cloud services. This is where the true stickiness of any ecosystem will lie.

Ultimately the biggest opportunity is to create an ecosystem that is simple and convenient to be a part of. This will drive product after product loyalty and keep consumers invested. And, if people eventually choose a product based on ecosystems, then any company dealing with a product needs to make sure they can deliver true consumer value throughout the entire solution if they want to keep their customers happy.

The key to building a stable ecosystem is to create value for everyone involved.