The use of software platforms to drive innovation and transform industries has exploded since the 2006 publication of my book Invisible Engines with MIT Professor and former Sloan School Dean Richard Schmalensee and Harvard Business School Professor Andrei Hagiu. Around the globe, invisible engines are ushering in a new era of technological change based on software. The Apple iPhone has shaken the mobile phone industry worldwide in part by creating a massive applications business built on the phone's operating system. Firefox has revolutionized the browser industry by encouraging developers to write add-ons and in doing so toppled Microsoft's Internet Explorer from dominance in many countries. Facebook has created a powerful social networking platform by opening itself up to developers. Amazon has started cloud-computing platform that enables entrepreneurs to access its vast software code, hardware and global communication systems over the Internet.
This Briefing Room article series will explain how software platforms are going to transform the payments industry and why you will be touched by this new revolution and perhaps even want to be one of the entrepreneurs or investors who pioneer this new area. I'm first going to provide background on the technology and business models behind invisible engines. I'm then going to show why this is important for payments and describe some of the main players that are leading the revolution at this point.
Invisible engines are based on software code. Software programs are written in various languages. Working by themselves or with other programs they tell hardware – from the pixels on your iPhone to the chip on your desktop to the communication devices providing your internet connection – what to do. They are the brains behind everything from the card reader in which you swipe your debit card to your social network page to the complex trading decisions at hedge funds to your favorite word processing package.
Software programs can become platforms that support other software programs when code that is written to perform a particular task could be made available to other software programs so the writer does not have to write that code again. That is what Windows does. It contains many little programs that help developers write their own programs. Microsoft provides a link to that code — called an Application Programming Interface (API) — that allows developers to link into the Windows code. Some businesses make their service available by providing an API. For example, YouTube provided an easy-to-use API for people to include access to videos on their social network pages.
By making APIs available, the owners of software programs are letting others use their intellectual property, the results of hard work writing code. They can benefit from doing this if others decide to write valuable applications that work with their software platform. More people are likely to use a platform if there are more attractive applications that work with it. For example, many users decided to switch from Internet Explorer to Firefox because there were add-ons for Firefox that did things that were not available with Internet Explorer such as support for XHTML – a popular programming language for webpage developers. Software platform providers do not have to make their code available for free though. Developers that sell their applications through Apple's App Store give a portion of their revenue (about 30 percent as of the end of 2009) to Apple.
Invisible engines are catalysts that use a multi-sided platform business model. They ultimately create value by making it easier — lowering the transactions cost — to get several different groups, whose members value each other, together. In the physical world a shopping mall is a two-sided platform that helps bring shoppers and merchants together. Software platforms generate value by reducing the cost to developers of writing applications for consumers and providing a common place for users and developers to get together. Facebook for example provides a place, not only for friends to get together, but also a place for friends to find applications that can help them and applications to find users that can benefit from them. Facebook helps developers do this and thereby creates value for its community and ultimately itself.
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