In the 1980s, Atari ruled the video game universe. Game developers flocked to the pioneering platform, churning out new titles. But most games developed for Atari were not Pac-Man-level quality, and that ultimately led to the platform’s demise. New research from Maryland Smith pinpoints the best strategies for today’s platforms to curate lots of high-quality content and avoid Atari’s fate.
With the right strategy, platform owners should never have to sacrifice quality for quantity, say professors Peng Huang and Yi Xu of Maryland Smith’s department of decision, operations and information technology, who co-authored the research with Gaoyan Lyu of Peking University. Their research, forthcoming in Management Science, looks at how platforms can regulate content quality without having to exclude too many developers.
Most platforms are two-sided markets, Huang and Xu say. Take video game consoles like Playstation or XBox, for example. You have game developers and game players with the platform as an intermediary. The more games a platform has, the more customers it will attract. When a platform has a lot of players, it will also attract more developers to create new games.
“The platform owner has this incentive to attract more developers,” Huang says. “But consumers – the players – also care about the quality of these applications. So if you attract a larger number of developers, but then most of the games they develop are low-quality, then the consumers will abandon the platform.”
That’s what happened to Atari – there were too many ‘lemon’ games developed, Huang and Xu say. And that's what today's platform leaders want to avoid. In fact, it's not just a pitfall facing video game platforms – it's a worry for any provider who relies on third-party content, including streaming services Netflix, Hulu and Amazon, and mobile app platforms such as iOS and Android.
Huang, Xu and Lyu evaluated three ways content platforms can regulate content quality: excluding low-quality content providers, subsidizing high-quality content providers, and investing in producing their own original content.
With an exclusion policy – the most-used strategy – platforms set a quality threshold that developers must meet. Case in point: Apple’s iOS. Apple won’t even list a low-quality app on its platform. Nintendo uses the same strategy, say Huang and Xu, with a chip that locks development access to their game console and keeps unlicensed developers off the platform.
The researchers looked at two alternative strategies: Subsidize high-quality developers to attract them to the platform, or develop content in-house. (Think “Netflix originals” content or Nintendo’s Mario games.)
For the subsidization strategy, “instead of denying access to low-quality ones, you give rewards to high-quality developers,” Huang says. For example, Google employed this strategy when it gave monetary awards to the developers who made the best apps for its Android platform.
So which strategy should platform owners use?
“The interesting thing is the most commonly used strategy, the exclusion strategy, is never the best,” Huang says. “In fact, it’s always worse than subsidization, and in some cases, the platform is worse off by using exclusion.”
“The other two strategies can both improve the platform revenue and attract more customers, as well as lead to higher-quality content. The subsidization strategy, in particular, is also beneficial to social welfare – the sum of the gains of all parties involved in the platform ecosystem. ”
When picking a strategy, platforms should first consider the costs of developing content in-house, Huang says. “Overall, more first-party content will improve the average quality on the platform. If it has fairly low development costs, first-party development is likely optimal.”
But it also depends on other things, like what’s the distribution of the high-quality versus low-quality third-party developers. “Our conclusion is if the distribution is more lopsided – say 90% of third-party application developers are low quality – then first-party application strategy is more likely to be the optimal strategy.”
In contrast, if the distribution of the high-quality and low-quality application developers in the market are roughly equal, then using subsidization will be the optimal strategy, say Huang and Xu.
Huang and Xu say the central takeaway from the research is that platform owners don’t need to sacrifice quality for quantity of content, and they don’t need to exclude so many developers.
“If you look at the other two strategies that we studied, this problem goes away in the sense that you can improve both quantity and quality at the same time," Huang says. "If you make the right choice, you can actually improve both.”
Read: “Quality Regulation on Two-Sided Platforms: Exclusion, Subsidization, and First-party Applications,” in Management Science.
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