Growing or Eating the Complementors’ Pie?
Evidence from Amazon Alexa's entry into smart-home markets
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Written by Runyu Shi, Aleksi Aaltonen, Ola Henfridsson and Ram D. Gopal.
One of the biggest worries of a third-party complementor is that the platform owner enters its complementary market and becomes a competitor. Platform owners such as Amazon often have superior resources and detailed data about platform users, giving them a competitive edge when entering a complementary market. As a result, an entry by the platform owner is often seen as a significant threat to third-party complementors. A recent example is Apple’s introduction of a password manager app that competes with third-party applications such as 1Password or LastPass.
Yet, is a platform owner’s entry always a bad thing for complementors? We studied this question in the context of Amazon Alexa voice assistant’s smart home complementary markets.
Our research shows that the effects of a platform owner’s entry are not always detrimental to smaller players. Focusing on Amazon’s acquisitions of Blink Home, Ring, and Eero between 2017 and 2019, we find that the impact depends on the maturity of the market at the time of the platform owner’s entry. Two of the entries, Blink Home and Ring, were considered early entries to an immature complementary market because of the low ratio between the number of complements in the market at the time of entry and the eventual size of the market. The acquisition of Eero took place when the entered market was already relatively mature.
Early vs. Late Entry
A late entry into a mature complementary market is almost always intended to capture value from the market, threatening to squeeze out existing complementors. For instance, we find that third-party complementors receive less attention on the market after the platform owner’s entry to such a market. In contrast, we find that an early entry into a complementary market in its nascent stages can stimulate market growth, benefiting both consumers and third-party complementors. This happens because an entry by the platform giant can reduce uncertainties in a fledgling market, draw consumer interest, and thus encourage more third-party developers to invest in the market. A platform entering at the early stage of complementary market evolution improves the viability of the market in the eyes of both complementors and consumers in a way that can benefit all parties.
The results of our study reflect the shifting dynamics that govern a complementary market throughout its evolution. Initially, a value creation logic dominates the evolution of the market. If a platform owner like Amazon steps in at this stage, this often acts as a catalyst that benefits not just consumers but also third-party complementors. The entry can diminish uncertainties associated with new and evolving markets. As these markets grow and consumer needs become more diverse, it is unlikely that a complement provided early on by the platform owner can meet all these needs effectively. Increasingly diverse demand creates ample opportunities for third-party complementors to innovate and expand their business, filling the gaps left by the platform owner.
However, not all complementors are equally positioned to benefit from a platform owner’s entry.
A Closer Look at Complementor Dynamics
Our research into Amazon’s Alexa voice assistant suggests that established complementors, those with more resources and experience, are often well-positioned to capitalize on the increased consumer attention following from a platform owner’s entry into a complementary market. For instance, Alarm.com quickly adjusted its pricing to make its offering competitive in a new situation. We also find that functionally specialized complements are more likely to benefit from increased consumer attention after the platform owner’s entry. Consumers are initially drawn to complements that are easy to understand and require little configuration in the new market. The latter finding is encouraging to smaller and startup companies for whom developing such a complement is within their reach.
“[W]hile a platform owner’s entry into a complementary market can be intimidating for smaller third-party complementors, … the timing of the entry plays a crucial role in determining its impact on the market.”
Overall, while a platform owner’s entry into a complementary market can be intimidating for smaller third-party complementors, our study highlights that the timing of the entry plays a crucial role in determining its impact on the market. This suggests that platform owners should communicate their intentions clearly especially when entering a nascent complementary market. Such communication can mitigate worries that the entry may create among third-party complementors.
From the perspective of policymakers, an attempt to regulate platform entry into its complementary markets should take the timing of the entry into consideration.
Finally, our results suggest that complementors can find, by strategically navigating these waters, opportunities for growth even in the shadow of platform giants.
This blog is based on Runyu, Aleksi, Ola and Ram’s research, which is published in Management Information Systems Quarterly (MISQ) and is included in the Platform Papers references dashboard:
Shi, R., Aaltonen, A., Henfridsson, O., & Gopal, R. D. (2023). Comparing Platform Owners' Early and Late Entry into Complementary Markets. MISQ, 47(4), 1727-1744.