The Double-Edged Sword of Backward Compatibility: The Adoption of Multi-Generational Platforms in the Presence of Intergenerational Services

Abstract

We investigate the impact of the intergenerational nature of services, via backward compatibility, on the adoption of multi-generational platforms. We consider a mobile Internet platform that has evolved over several generations and for which users download complementary services from third party providers. These services are often intergenerational: newer platform generations are backward compatible with respect to services released under earlier generation platforms. In this paper, we propose a model to identify the main drivers of consumers’ choice of platform generation, accounting for (i) the migration from older to newer platform generations, (ii) the indirect network effect on platform adoption due to same-generation services, and (iii) the effect on platform adoption due to the consumption of intergenerational services via backward compatibility. Using data on mobile Internet platform adoption and services consumption for the time period of 2001-2007 from a major wireless carrier in an Asian country, we estimate the three effects noted above. We show that both the migration from older to newer platform generations and the indirect network effects are significant. The surprising finding is that intergenerational services that connect subsequent generations of platforms essentially engender backward compatibility with two opposing effects. While an intergenerational service may accelerate the migration to the subsequent platform generations, it may also, perhaps unintentionally, provide a fresh lease on life for earlier generation platforms due to the continued use of earlier generation services on newer platform generations.

Keywords: Platform economics, multi-generation diffusion, backward compatibility, lease on life, network economics

JEL Classification: L86, L96, O33