Does Platform Owner's Entry Crowd Out Innovation? Evidence from Google Photos

Abstract

Platform strategies have become important for leveraging complementary innovation. When firms follow a platform strategy, the focus of value-creating activities shifts from the coordination of production and supply toward the governance of complementary innovation. We study the consequences of platform owners’ decision to compete with complementors by entering their market segment with an own, rival product on the innovation output of complementors. We exploit a unique setting provided by Google’s entry into the market for photography apps on its own Android platform in 2015 as a quasi-experiment. Whereas several existing models predict such an entry to erode complementary innovation, our analyses of time-series data on a random sample of 6,620 apps suggest the contrary. After entry, complementors were more likely to incrementally innovate their photography apps and to release new apps to the affected market category. We estimate that the entry caused an increase in the likelihood of major app updates by 9.6% for apps affected by Google’s entry, as compared to similar but not affected apps. Further analyses lend little support to the “racing” or “Red Queen” explanation that increased innovation is a competitive response to entry. Instead, our analyses suggest increased innovation to result from a spillover of consumer attention. Our findings suggest that Google's entry created additional consumer attention and demand for photography apps, which spilt over to complementors in the same category. This attention spillover effect was particularly pronounced for larger and more diversified complementors. We discuss implications for research, policy, and practice for managing complementary innovation in digital platforms.

Keywords: Platform Entry, Complementors, Innovation, Google Photos, Racing, Red Queen, Attention Spillover