The Strategic Tool Of Working With Others (Or Not)

Most of the innovations in the digital space, whether small or large, are fueled by a concept we call interoperability or "interop": the ability of complex systems, applications, and components to work together.

Interop functions on several layers. In the most basic sense, it is the ability to transfer and render useful data and other information across systems, including organizations. Take email as an example. We send (too) many emails all the time and take it for granted. Behind the scenes, however, a significant number of systems and components—think of hardware, protocols, data formats, and applications—need to work together to at the technological and data layers to enable this form of electronic communication.

But interop is not only about technology and data. Just as it is important that systems work together at these technical levels, it is often equally important that human beings and even institutions engage effectively. Air traffic control is a great illustration in this context, where both technical systems as well as individuals—pilots and air controllers, among others—need to work together in an agreed upon framework of standards and regulation to make the system work safely.

Interop is also an important concept for understanding and improving many of the complex systems of our time—from the electrical grid to the health care system—and a key decision point for business executives of tech companies and entrepreneurs alike. Put differently, the success or failure of businesses in the digital economy largely depends on getting "interop" right as a matter of strategy. At a basic level, companies have to make choices about interoperability when creating a new product or service, which might be designed in such ways that it interoperates with others—or not.

Technology companies can pursue a number of different interop strategies, ranging from fully interoperable to "closed" approaches. A powerful example of a successful strategy based on high interop is Facebook. Facebook created a complex system that is deeply interconnected into the network itself, into the business models of its competitors, and into the lives of its users. A high degree of vertical interoperability is at the core of its design. Since the introduction of the "Facebook Platform" in 2007, which provides key tools for software developers in and outside of Facebook, we have witnessed the emergence of a large ecosystem of applications built by third parties—a key driver behind the success of Facebook with its more than 900 million users.

Apple, now the largest technology company in the world by market capitalization, became famous for applying and defending a strategy of non-interoperability with much success. The iconic iPod was designed in such ways that in only worked with the iTunes software, and the iTunes Store only sold music in proprietary formats that were incompatible with competitors' products. The decision to develop systems that interoperate only internally, but not with other products, led to excellent functionality for consumers with the intention to keep them happy using only Apple products.

There are different factors that help explain why companies make the choices they do about interoperability strategy. For instance, whenever a company believes it has an initial competitive advantage and will be the winner "taking it all" by tipping the market in favor of its product or service, it is more likely to adopt a non-interop approach. A large and loyal user base, a strong brand (as in the case of Apple), or a great reputation can give a company such a strategic advantage over its rivals on markets with strong network effects, making a non-interoperability strategy more sensible.

However, among the most fascinating aspects of the interop game is the fact that a company's strategy is likely to change over time. Some companies, for instance, may pursue a non-interop approach over many years, but then transition towards a pro-interop strategy. Microsoft is a case in point, which had to pay multi-billion dollar fines for excluding competitors from some of its products by refusing to disclose interop information, while it is now a leader of interop initiatives in the cloud context. Apple's approach to interop has also evolved. In 2007, four years after Apple introduced the original iPod, music on iTunes became available for purchase in formats capable of being consumed with competing hardware and software products.

Other companies started with a highly interoperable strategy and have become less interoperable more recently. While still highly interoperable, Twitter has occasionally taken actions that have undercut its community of third-party developers. For example, in 2010 and 2011 Twitter purchased "Tweetie," an iPhone app for Twitter, and "TweetDeck," a desktop Twitter app, and in the process became a competitor to other third-party Twitter app developers. More recently in June 2012, Twitter ended a three-year partnership with LinkedIn which had previously enabled the automatic publication of Tweets to a LinkedIn account. In the official announcement, Twitter also hints that its policies towards third-party developers may become more narrow as the company "will be introducing stricter guidelines around how the Twitter API is used." Similarly, Apple has been known to reject submissions to its App Store or remove integrated third-party features that are (or become) duplicative of "Apple features" already included in its iOS operating system for iPhone and iPad. Google Maps suffered this fate after Apple announced its new 3D Maps app for iOS 6 in June 2012.

Whether entrepreneurs and business leaders ultimately decide to pursue a pro-interop or non-interop strategy, the key point is in either case that interoperability has become a key instrument in the strategic toolbox of corporate decision-makers. In order to be successful in today's digital marketplace, company leaders are well advised to think carefully about their approach to interoperability as well as the best ways to achieve—and how to adjust it over time in case circumstances change. In all these cases, interop strategy-making is not limited to technology, but should also include human, organizational, and policy considerations.

John Palfrey and Urs Gasser. Excerpted from Interop: The Promise and Perils of Interconnected Systems (Basic Books, 2012).

[Image: Flickr user Georg Sedlmeir]

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