Why There's An App For That

When a platform owner like Google or Apple creates an app on their digital platforms that competes with ones already offered by other companies, does it foster innovation — or stifle it?

In new research, Sunil Mithas, Ralph J. Tyser Professor of Information Systems at the University of Maryland’s Robert H. Smith School of Business, and three co-authors, Jens Foerderer (University of Mannheim), Thomas Kude (ESSEC Business School) and Armin Heinzl (University of Mannheim), study what happens when a platform owner enters the market with a product that directly competes against rivals in the app store.

As a “quasi-experiment,” the researchers focused on the release of Google Photos, a photography app designed specifically for its own Android platform in 2015. The all-purpose app was designed for organizing, editing and sharing photos, and began to compete with thousands of complementors on its own platform, raising questions about the impact of such an entry on innovation in the app ecosystem.

What did the researchers find? “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,” they wrote.

The researchers used panel data on a representative sample of 6,620 apps from the Google Play Store. They observed the apps monthly, beginning three months prior to and ending three months after the release of Google Photos, and estimated the impact of entry on innovation following a difference-in-differences (DID) framework.

After the entry of the platform owner’s app, rival app makers — they’re called complementors — became more likely to incrementally innovate their apps and to release new apps in that market category. The researchers estimate that platform owner’s app stirred an increase in the likelihood of major app updates by 9.6 percent, compared to similar but not affected apps.

The researchers find little proof that the innovation was a result of racing or “red queen” scenario, in which the innovation is prompted by increased competition among complementors. Instead, the researchers find, the new innovation results from a spillover of new attention from consumers. “Photo management apps strongly increased in consumer attention as inferred from differences in the number of reviews they received following Google’s market entry, thereby creating a new and strong incentive for complementors to innovate,” the researchers note.

And that attention spillover effect, they found, is more pronounced for larger and more diversified complementors. The researchers infer that larger complementors with a larger or more diversified stable of apps are more likely to view the platform owner’s entry into the app store, and the subsequent rise in consumer attention, as an opportunity, not a threat. And that’s likely to motivate them to direct their efforts toward that particular category.

Read more: Does Platform Owner’s Entry Crowd Out Innovation? Evidence from Google Photos is published in Information Systems Research.