Opportunities in platform launches

Guided by the theoretical framework, this section analyzes the opportunities, which incumbents can leverage in launching a multi-sided platform. Resulting from the focus on the role of an incumbent, while the opportunities (1) establishment of network externalities and (2) low marginal costs are addressed only briefly, particular emphasis is placed on the evaluation of firm-level factors. Thereby, (3) knowledge and experience, (4) financial backing, (5) existing customer base, and (6) brand recognition are found to generate competitive advantages for incumbents.

Establishment of network externalities

The establishment of network externalities strengthens the ties of the customers to the platform. Network effects are strong when the mutual dependency of the platform agents is high. Since incumbent-owned software constitutes the core of the platform, the customers are not necessarily dependent on the offers of third-party providers. However, C1 (2020) describes that the velocity of changes in requirements has accelerated to a point where established software suppliers are no longer able to keep pace. Therefore, they are

60 of 125 working with an increasing number of other systems to cope with the deficiencies of the incumbent's solution. Furthermore, they are partnering with other startups and indicate a low threshold to switch to other solutions, especially if offered access to an ecosystem:

"If that other vendor of similar value proposition would have the ability to engage in an ecosystem, have the open APIs, etc. […] that will have a very strong and appealing value proposition" (ibid.). In awareness of their inability to serve all needs through in-house creations, SC1 (2020) perceives an additional opportunity in positioning the company not only as a bridge to the new technologies but also as a leader to innovative solutions: "We [SimCorp] can grow this ecosystem of sub solutions that can provide offers and optionality to our customers. [...] So if we somehow could become the tech partner, who can also provide our customers a safe ground into all these new opportunities, then I think we could actually add a competitive advantage".

Transforming the software into a multi-sided platform provides the opportunity to establish network externalities, which thereby strengthens the affiliation of the users to the platform. While the establishment of network externalities depicts a lucrative opportunity per se, the firm-level opportunity 'existing customer base' discusses in further detail how the role of the incumbent provides a significant competitive advantage in comparison to new market entrants.

Low marginal costs

The opportunity of leveraging a platform's low marginal costs is found to be inapplicable since the evaluated platform does not have exclusive marketplace character but aims to integrate third-party services to the core software (SC1, 2020; SC2, 2020). Therefore, even though ambitions are made to establish "standard contracts optimized for scale"

(SC2, 2020), which allow for streamlining partner integrations, substantial monetary and human resource investments in terms of API development are required, especially in the early stages of the platform. Moreover, the platform is based on a complex legacy system.

Hence, interfaces are required to enable the transformation to a platform system (SC2, 2020). Section 5.1.3. discusses these challenges in further detail.

61 of 125 Knowledge background and experience

According to the industry experts, as well as both representatives of the incumbent, knowledge, and experience provide incumbents with a crucial advantage, especially in a high-sensitive industry such as the financial software industry. "I think experience matters a lot within regulations. There is so much compliance and regulation within the financial industry, if you don't have anyone that has experience within that then […] you lose"

(CPH FinTech, 2020). More precisely, experience is found to directly translate into maintaining quality standards as well as product superiority: "In terms of quality assurance I think incumbents have a huge advantage over startups, because they have so many more experienced people working on the product to properly overview the quality of it [...]. It would be more risky [...] to use an unestablished startup's open platform, rather than using an incumbent's open platform" (PWC, 2020). While two of the three startups (S1 & S2) attribute high value to experience and knowledge background, they refrain from acknowledging this factor as purely characteristic of an incumbent. "I have no issue whether somebody is a new startup or an incumbent. What I am concerned about would be is how well can that company implement [...] and whether they were able to show me a track record of implementing" (S2, 2020). However, knowledge and experience can also create internal resistance to change. This challenge is discussed in section 5.1.3.

Financial Backing

Unsurprisingly, in comparison to new market entrants, incumbents have higher financial resources, which can be leveraged in platform launches. PWC (2020) highlights the significance of this advantage as it impacts the implementation period of the initiative:

"Especially in terms of financial backing there is a huge difference because startups will […] have to work entirely bootstrap when building a new platform so they might be able to move faster, but because they do not have the funding […] it might build the product a lot slower".

However, the investigation of the presumed assumption that incumbents derive a competitive advantage over startups in terms of financial resources reveals the necessity of distinguishing among the different legal structures. Both incumbent representatives

62 of 125 elucidate the perspective of a publicly-traded company as difficult due to the pressure of maintaining a stock price. SC2 (2020) describes the incumbent's situation in comparison to a privately owned competitor as follows: "If [the competitor's management] believes this is important enough, then [they] can find the 10 to the 50 million euros it is going to take to make this process faster. We [SimCorp] don't have that option because we have to keep our stock price level". Moreover, according to SC1, the traditional business opportunity evaluation methods applied in publicly traded companies fail to account for the long-term outcome of more innovative initiatives. "It is the old world. It is the incumbent's business way of looking at or evaluating a business opportunity that is also applied into the new area. [...] If you use the same old school tools on the new models, then you are sure that the new models will never win, because you need to calculate and see things differently" (SC1, 2020).

Existing customer base

The opportunities deriving from existing customer relationships are twofold. First, the incumbent avoids the biggest challenge multi-sided platforms are usually confronted with, the 'chicken and egg problem'. Second, as a result of the conservative market characteristics, switching costs are high. Therefore, current customers are more likely to join the incumbent's platform instead of switching to a competitive service.

Not only does the existing user base play a critical role in the attraction of new platform players, in the case of the examined incumbent, but this advantage is further enhanced by the status of the industry leader. Both incumbent representatives (SC1, 2020; SC2, 2020) emphasize not only the number of customers but also their quality. "I think our customer base is a is a leverage point, because we have access to users and customers that you do not just get access to" (SC1, 2020). The attractiveness of an established customer base is further confirmed by S1 (2020): "What attracts me is a channel that I am not currently in or I am getting to customers that are not currently talking to". The findings regarding marquee users will be analyzed more closely in the next subsection, which addresses the challenge of the 'chicken and egg problem'.

63 of 125 The interviews further elucidate that the financial service industry is characterized by conservative and risk-averse players. SC1 (2020) further adds: "It costs millions [...] to go from one system to another, so the switching cost in the industry, in general, are super high, and it will remain that way [...] at least within the next five years". Although customer C1 (2020) does not exclude exchanging their software solution with a competitor's product, it similarly describes the scope of this undertaking as "big strategic consequences and considerations". The risk-adversity of the customers, in combination with the enormous costs associated with the set-up of a new financial software system, the existing customers are tied to the incumbent's system more strongly. Hence, the existing users are more likely to join the transformation to a platform system.

Brand recognition

Incumbents, in contrast to new market entrants, have established a brand reputation.

According to CPH FinTech, prominence and recognition of the incumbent's brand equip the firm with a significant competitive advantage as the startup is required to dedicate a considerable part of its resources on building a brand. Furthermore, the role of an incumbents benefits the attraction of attention, whereas startups need to offer a "crazy competitive edge in user experience" (CPH FinTech, 2020) in order to win customers.

This effect is aggravated when the company is not only an established incumbent but the industry leader: "[For the incumbent] it means that the product does not need functionality that is ten times better than their competitors in order for them to get people to use. And that is a huge competitive advantage because if you do not have to be better on the product, it is kind of easy for you. And if you are a startup, you probably have to be ten times better than the other product in order for many people to use it" (CPH FinTech, 2020).

In terms of attracting companies to offer their services through the platform, however, S3 (2020) argues from a startup perspective: "We are not as interested in the brand or the company itself. It is really about what is the business case. What is the upside for us?".

S2 (2020) shares this perception to some extent but emphasizes that rather than brand recognition, it is looking for corporate credibility in a platform.

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