While Schibsted has capitalized on the power of “user connections”—fostering the development of networks that connect users—Anand’s research also underscored the importance of “product connections.” One example is the case of complements—where a user’s value from consuming two products is greater than the sum of her values from consuming each alone. As Anand points out, this particular idea isn’t a new concept, and it’s been popularized recently by economists Adam Brandenburger and Barry Nalebuff. But it has special relevance for content companies, as value shifts from content to its complements. In his new book, “The Content Trap: A Strategist’s Guide to Digital Change,” Bharat Anand offers four lessons about complements:
1. Expand your vision, not narrow it.
Some complements are obvious: Hot dogs and ketchup, printers and cartridges, razors and blades, right and left shoes. But many are not.
A tire manufacturer—Michelin—offers restaurant guides, eventually becoming so successful in doing so that it creates a worldwide standard for assessing food quality. It’s not that making tires somehow translates into skill at recognizing good food; it’s that making customers aware of high-quality food in faraway places spurs driving.
Complements often explain the success or failure of innovative products, too. A big reason for the Kindle’s success wasn’t the features that improved e-reading, but a key complement that facilitated e-purchasing: wireless connectivity. Growth and innovation often come not from offering better content, but from offering better and cheaper complements.
It’s good not to define products or business boundaries too narrowly. To do this, ask what complements your customers find useful when they buy from you, not just what features they care about in your product alone.
At its launch, the iPhone was basically a phone with a few added features. It had all of nine applications: Maps, Stocks, Weather, iPod Calculator, Mail, Camera, and a few others. At first glance, the apps weren’t what made the iPhone unique; BlackBerry and Nokia phones also had some. But Apple’s were accessible by simply touching the screen, and the product was easy to use. Apple’s hardware innovation seemed to be driving sales and success once again.
Within a year, however, the consumer research indicated something quite interesting, and quite different. Whereas users of other smartphones spent about 70 percent of their time on plain-vanilla phone service—making calls—exactly the reverse was true of the iPhone. The nine apps alone—the complements to hardware and voice services—were accounting for more than 55 percent of time spent by Apple iPhone users.
2. Dare to price low—but know where to do so.
Managing complements requires not only identifying them and increasing their supply; it requires pricing them right. But what’s “right”? Apple’s pricing of iPod and iTunes violated perhaps the best-known rule in the book for pricing complements—the familiar razor-razor blades model.
“Price the durable cheap, and make profits off the consumable,” was the conventional thinking around complements pricing. The rule had worked beautifully for decades—for Gillette and other manufacturers. It had also worked marvelously in other product settings, such as printers and cartridges, or consoles and videogames.
Why did Apple reverse this tried-and-true approach? It had to do with who was on the other side of the table when it came time to splitting profits. For every song downloaded, only one studio held the artist’s rights. So Apple’s position was a bit like negotiating against a monopolist. But when it came to the $100 in profits that Apple commanded from the iPod, the company was negotiating with dozens of near-commodity component assemblers. The power there rested with Apple.
“Price hardware low, services high” is a rule that’s sensible for razors or printers, where a single firm made both products. But it wasn’t for Apple, since it didn’t. Indeed the real lesson about complements pricing turns out to be this: Price according to where you have a competitive advantage, not just based on rules that make sense for others.
3. Exclusive connections: From industry complements to product complements.
Did it matter whether 99-cent iTunes songs or free pirated music was the real complement to iPod sales? Both yielded similar quality music. Both could be played however long the user wanted. And both made similar contributions to iPod profits. But the two differed in an important respect: iTunes benefited iPod users only; because of its DRM technology called FairPlay, no other MP3 player could access iTunes. Pirated music, on the other hand, aided every MP3 manufacturer.
The fuss over apps isn’t because the total number of apps matters to the average, or avid, user. What does matter is exclusivity over them. Create one million apps and it might appear like you’re creating a powerful ecosystem for your device, but their competitive effects are neutralized if they are available on competing platforms. Create “killer apps” exclusive to your platform, and that is the nightmare scenario for your rivals.
Consider Maps. In 2012 Apple removed Google’s acclaimed app from the iPhone, replacing it with one of its own. It did so not because Google’s product was bad or unpopular. Quite the reverse: About 25 percent of smartphone users used it actively. The frightening scenario for a product developer (in this case, Apple) is negotiating with a provider of the killer complement (in this case, Google).
View Apple’s decision to remove Maps through the lens of software quality and it appears foolish. View it through the lens of complements management and it suddenly appears far less so.
4. Ask not what your core business is, but know when you’re someone else’s.
Complements are marvelous when it comes to creating value for your customer. But when it comes to capturing that value, they invariably benefit at your expense. Consider razors and razor blades, printers and cartridges, CDs and concerts: In each case, one product benefits from lowered prices of the other. So it’s important not just to know what business you are in—an increasingly popular strategic question—but to know whether you’re someone else’s complement.
“Companies are sufficiently focused on their strategy and not on their complements’ strategy, but that’s how the game is often played,” Yale economist Barry Nalebuff told me recently. “You can have the world’s best gas pumps. But if you don’t have a convenience store, you just lost to somebody who does. GMAC made more money from GMAC [its auto financing arm] than from selling cars. Railroad companies recognized a decade ago that they were worth more for the fiber rights alongside their tracks than for the railroad themselves.”Ask not what your core business is, but know when you’re someone else’s.
Content businesses continue to learn about the economics of complements the hard way. Ninety-nine-cent and DRM-free music was a choice by Apple, free office applications through Docs a choice by Google, and $9.99 e-books a choice by Amazon. In each case the choice related not only to a strategy for propping up value in the (company’s) core business but to reducing the price of, or even commoditizing, the complements. Therein perhaps lies the greatest challenge for content producers: Their future will depend not only on what they make but on how effectively they manage value-creating opportunities in adjacent areas.