Value Creation in IT Service Platforms through Two-Sided Network Effects

Abstract

IT service businesses can achieve economies of scale and scope faster than in traditional product businesses. In particular, as IT service platforms will become the founding infrastructure of our economies, the analysis and understanding of the value that a service platform can generate is of great importance. IT service platforms provide all involved market participants with different values. For this paper, we consider application service users, service developers and service platform providers as market participants and analyze the interrelationship between the value creations of these market participants. The basis for the description of the values and their interrelationship is the identification of parameters. Based on these parameters, a simulation model has been developed. It helps inferring the relative impact of these parameters on the evolution of the IT service platform stakeholder values. The results imply that there is a two-sided network effect. All stakeholders of a service platform mainly benefit from a growing installed base of application users. The benefit of a large service variety, however, mainly benefits the service platform provider. Therefore, we can state that a large fraction of the value from two-sided network effects goes to the platform provider.