Disseminate the Nested Two-sided Network Strategy

Traditional one-side businesses are referred as supply-side economies of scale, cost is spread across a large customer base. Unfortunately, growth beyond some point usually leads to diminishing returns: Acquiring new customers becomes expensive as values are diluted across larger customer base. In contrast, a two-side network exhibits demand-side economics of scale, larger the customer base, greater is its ability to attract more customers; value improves as customer base grows (Eisenmann et al., 2006; Lee 2001).

Past papers on two-sided business model have mostly based on pricing decisions affecting the volume of transactions (Demange & Gale, 1985; Eisenmann et al., 2006; Evans, 2002b; Hagiu, 2006; Rochet & Tirole, 2003). The idea is to create a positive cross-side network externality when one side, attracted in volume, becomes highly valued by the other side. To bring both side on board, platforms usually subsidize the quality and price sensitive side (subsidy side) and let the other side (money side) paid the dues to reach it (Eisenmann et al., 2006). In other words, the price structure matters and platforms must design it so as to bring both sides on board (Evans & Schmalensee, 2013). Value grows as the platform matches demand from both sides (Eisenmann et al., 2006).

Indeed, pricing structure plays an important role in balancing the two sides, but past literature on two-sided network has not examined how the subsidy side is able to sustain its attractiveness to the masses over time, more specifically, past literature has not consider the existence of a two-side network nested within the subsidy side of its parent which could be responsible for large part of the overall value creation. With this research gap in mind, I am proposing that many of large two-sided business platform adopts a business strategy of hosting nested two-sided platforms as ways to add value to its primary business. In a sense, a nested two-sided platform could be viewed as a strategic asset that could either be indigenous to or acquired by a parent network. It also could be viewed as a group having a “stake” in the parent’s primary business that it is to the best interest of the parent to manage it effectively to achieve its primary objectives.

In our conceptualization of nested two-sided business strategy, we took the account that not all nested two-sided networks are created equal. Some are indigenous to the parent platform and others are acquired through merger or related through alliance. Those that are indigenous to the parent can either be pecuniary or non-pecuniary in nature and those that are acquired or allied are likely be able to sustain independently. With this note, we answer the question of how nested two-sided platform can increase the value of its parent’s primary business and what the mechanisms are through which the nested two-sided network can capture value.

To demonstrate the validity of this setting, we present a longitudinal case study examining four major, but very different firms– Amazon.com, Apple, Inc., Facebook, Inc., and Google Inc. Each firm has a clear two-sided platform nested under its primary business. The analysis is conducted on Amazon's product review, Apple’s iTunes, Facebook’s Farmville, and Google’s YouTube. Our analysis is conducted using secondary data including annual reports and financial statements, news releases, as well as existing research evidence such as prominent case studies, journal articles, books, etc. The results of our study show that all four companies have successfully adopted nested two-sided strategies resulting substantial increase in value and growth.

The results contribute theoretically to the two-sided network literature by analyzing the role of nested two-side network on its parent, which was not explicitly studies in the past. The analysis also brought new insights from the perspective of network complementarity and stakeholder view. Empirically, we analyze how nested two-sided network are utilized and combine these insights with theoretical development, resulting in propositions on the nature of nested two-sided network and its role in value creation and reciprocation.

The remainder of this study is formulated as follows. First, we discuss the key concepts of the study. Second, we develop a theoretical model from existing literature. This is followed by a longitudinal case study of each of the four firms in term of their nested platform strategy. Next, we put forward a set of propositions on the nature and the role of the nested two-sided platform and the rationale of nurturing such network within the subsidy side of the parent firm. Finally, we present our conclusions and suggestions for further research.