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How Microsoft grew into a giant

Microsoft chairman Bill Gates in 1986

Microsoft was still a no-name startup based in Redmond, Wash. when it launched its operating system, MSDOS in the early 1980s. From the beginning, however, the company believed that this was not your average product launch. MSDOS’s design allowed it to adapt easily to different hardware, reducing entry costs for potential users. And Microsoft encouraged participants to tailor MSDOS for particular environments, meaning that the product could actually improve over time.

Like any good platform, however, MSDOS was only as valuable as its network. While it did not have a large user base in its early years, Microsoft (MSFT) soon negotiated relationships with tech giants like IBM (IBM) and Intel (INTC), fueling growth expectations and motivating more early adopters to sign on. In this way, the platform was able to quickly gain critical mass and achieve network effects — that wonderful position when the value of the network increases for all participants as more members join. This growing value helped to attract even more participants. By relying on growing economic incentives to attract and engage participants, Microsoft significantly reduced the overhead costs that often slow, or even limit, the growth of more conventional business networks.

Perhaps even more important than its network size was how individuals interacted with and tailored the MSDOS platform. In some respects, the common platform leveled the playing field among participants, creating incentives for them to “protect their turf” by improving their own performance. As the number of participants continued to expand, both competitive pressures as well as the spoils of success increased, perpetuating a cycle of continuous innovation around the standard platform.

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In many cases, different participants teamed up to make the network better, while others chose to work on their own. Without any intervention from Microsoft, these interactions among participants evolved into complex webs of collaboration, where the interactions were not just one-to-one, but among groups of different players. This resulted in an explosion of experimentation. Many of these promising ideas were quickly adopted by other participants, and those that failed served as collective learning material. In this way, each participant, and the ecosystem as a whole, learned much faster than they would have on their own.

The first release of the Microsoft platform may seem like ancient history, but it illustrates the powerful potential of what we call “web ecosystems.” In nature, the webs we discover can inspire awe and defy explanations. A well-constructed cobweb, for instance, can span a seemingly impossible distance from its central point and remain intact even in heavy rains and wind that send neighboring leaves and branches to the ground. It is no wonder, therefore, that this image of strength and subtlety has become an oft-referenced metaphor in so many other domains (yes, we’re speaking of the World Wide Web, among others).

As we researched ecosystems (gatherings of business participants engaged in some form of collaboration), we found that the well-worn term perfectly characterized the nuances of MSDOS and other webs. These ecosystems are particularly interesting because of their scalability — webs have the potential to mobilize hundreds of thousands, even millions, of participants. More than just scalability in numbers, webs also support a much broader range of innovation than other kinds of collaborative ecosystems. Just as intricate patterns emerge on the edges of spiders’ webs, so too can distinct and exciting innovations emerge from different pockets of a given ecosystem.

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Web ecosystems often rely primarily on economic incentives to mobilize its participants. Platforms of some sort are usually involved in catalyzing and growing web ecosystems, but the platform developer often tries to expand participants’ abilities to work with each other rather than tightly specifying what they can and cannot do.

Consider the differences between Apple’s (AAPL) iOS app store to Google’s (GOOG) Android marketplace. Apple’s app platform, though highly profitable, does not constitute a web ecosystem. Apple’s structured development regulations and rigorous screening process limit the scope for experimentation and require a significant level of interaction between the platform developer (Apple) and the participants. It offers the benefit of more reliability for its users and an adherence to certain quality standards.

By contrast, the largely open Android platform does represent a web ecosystem. Android offers more freedom for developers to experiment and test potential applications. The relaxed and flexible structure means that a greater number of “amateur” applications are available, but it also creates many opportunities for collaboration and innovation.

Though many of today’s examples come from technology companies, the applicability of web ecosystems extends further than this domain. Consider the story of Malcolm McLean, a truck driver in the 1950s. After seeing the need for greater coordination between different groups working in shipping, McLean developed a standardized shipping container and made the standards available industry-wide. By encouraging port authorities, shippers, and crane companies to invest in new equipment and practices to support this standard, McLean, much like Microsoft, was able to speed up adoption and quickly reshape the global industry.

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We expect these web ecosystems to become more prevalent in the future. Big Data, for example, may become fertile ground for new web ecosystems. As certain companies accumulate richer and more detailed profiles of customer behavior, these bits of data can be used to create a “platform” that participants can use to develop innovative products and services. Government 2.0 projects, which make available data accumulated by various government agencies, represent another promising web ecosystem.

Web ecosystems have meaningful implications for many industries today. For starters, we would single out health care, financial services, media, and the energy industries ripe for disruption. But let’s not stop there. Is your industry ripe for change at this scale? What would a web ecosystem need to look like in your field? Like stumbling across an ornate and resilient spider web, the results might surprise you.