What is a digital ecosystem? – Understanding the most profitable business model
Digital Ecosystems made the most profitable companies in history - Understand the implications and what they are about
Amazon, Google, Apple & Co. grew their own digital ecosystems. We explain what digital ecosystems are and what roles you can have as an individual and as a company to participate or create own ecosystems in the digital world.
One of the most promising (and already proven) digital business models of the 21st century now is the platforms and digital ecosystems. This is why it’s important to understand what digital ecosystems are and what roles you can have in these ecosystems.
The variety of digital ecosystems is already broad and most of the well-known ecosystems span multiple industries and involve different sectors of industry, partners, competitors, customers, and businesses. This defies also traditional mindsets in the industry. The “control and centralize” approach is breaking apart and a mindset of “connecting and combining” comes forward. That is why it is also one of the most successful disruptive business models.
So, one of the most important parts is to understand that these digital ecosystems are not able to survive with just one single participant. There are different roles involved to make it work. Sometimes even giving the competitor a better position can pay off.
Reccomended readings that should give you more understanding on the digital ecosytem topic and the connected platform dynamics:
- Platform Economy explained
- Platform Business Model explained
- Guide on starting and scaling platforms
- Why platforms fail – 8 Reasons that lead to failure
- Platforms and Content – The business model of the 21st century
Index
What is a digital ecosystem?
A digital ecosystem is a network of interconnected digital technologies, platforms and services that interact to create value for businesses and consumers. It consists of different elements such as software, hardware, data and people that work together to facilitate digital transactions, communication and collaboration along different customer journeys. These customer journeys can be interconnected and the ecosystem can support different activities such as e-commerce, social networking, software solutions, hardware offerings and digital entertainment. In a business context, a digital ecosystem can also refer to the set of digital platforms and technologies that a company uses to engage with its customers, partners and other stakeholders.
A digital ecosystem focuses on adding value to customers by optimising data and workflows from different internal departments, tools and systems, as well as from customers, suppliers and external partners. It should remove barriers to the customer journey and enable each participant in the ecosystem to use the latest technologies and systems to meet their individual needs.
For these ecosystems offer customers a unified and easy to use system that delivers value through a variety of services, products, and insights. This also allows the platforms to grow exponentially and outpace the normal market by using several mechanics involved.
This also means that a variety of business models are possible when scaling an ecosystem. From direct sales of products and services to advertising, subscriptions and more. By better understanding the customer and refocusing the product offering, it is possible to increase the number of services and products offered with the number of insights gained from customers. This makes digital ecosystems so powerful and profitable that the list of the world’s most valuable companies is led by companies that harness the power of digital ecosystems. There you will find Apple, Google, Facebook, Microsoft and many others who are using their customer base and an ecosystem approach to grow revenues and provide better products and services to their customers.
A great Example for this is also Amazon which I explain now in more detail.
Digital Ecosystem Example: Amazon
Since around the year 2000, Amazon has been steadily building its digital ecosystem. At first, the retail giant needed to build a massive server infrastructure around the globe to serve customers on its e-commerce platform. But soon Amazon began renting out server capacity to other companies. This move led to Amazon Web Services (AWS) and was an important milestone for the company in creating the massive ecosystem it has today.
Amazon used its own AWS infrastructure not only to provide infrastructure services to other companies, but also as a launch pad for all its other services such as Amazon Prime Videos, Prime Music, Studio, etc. This led to a rapid build-up of services around the Amazon universe and also a kind of lock-in for many users. You had the benefits of being a Prime customer and getting packages faster, you had access to Amazon Music and you could even watch shows and movies from the Prime library.
Amazon then brought in a lot of outside companies to participate in that ecosystem. So the e-commerce part was the first to open up and allow competitors to use this infrastructure of services and tools that Amazon offered. This made them a huge success if you look at the whole Amazon ecosystem. The following overview I have created gives you a quick insight into the huge ecosystem Amazon has built. There are more than 40 Amazon subsidiaries today, with more to come.
5 key characteristics of a digital ecosystem
Customer-centric
If you look at the most successful digital ecosystems (I mentioned Amazon earlier), you can see that they are strictly focused on value creation. Sometimes these ecosystems didn’t even have a monetisation model in the beginning because they focused on the customer and understanding the customer, as we will learn in the next chapter on data, before they even started to put a price tag on services or offerings. Customer centricity is not just about the customer service or personalised advertising/marketing that the company provides, but about the full spectrum of customer centricity that is only possible because of the size of the company. It means working holistically and collaboratively across departments, products and services to integrate the customer journey in the best possible way.
Data-driven
One of the main benefits of a digital ecosystem is the ability to gather more information about processes, customers, transactions and more. This makes data one of the most important factors for any digital ecosystem. The more you know about your customers, the better you can provide services, software, technology and tools to improve the customer journey.
Automate
With the vast amount of insights that digital ecosystems gather from customers, suppliers and third parties, it is also possible to make these insights actionable. Automation is one of the key elements when it comes to lowering prices, improving customer satisfaction, but also offering new services/products to increase the value stream.
Global
You may have guessed that a global footprint is necessary. Digital ecosystems are there to scale, and if you limit them to one country or region, you will never reap the benefits of a platform and ecosystem. This means that digital ecosystems also need to be built to enable collaboration across countries, regions and even languages. Sometimes even cultural barriers have to be overcome.
Dynamic
Because of the scale of digital ecosystems, it’s also worth noting that the mindset needs to be very dynamic. Ecosystems need to adapt and respond quickly to changing market dynamics, otherwise the user base will move on and switch platforms. Business intelligence, rapid decision making and the use of new technologies and business models must be at the heart of every decision.
3 key roles in a digital ecosystem
Before you start thinking about how you’ll build an ecosystem, you need to think about your business and what you offer. This also means that you need to work out which ecosystems are important to you and what role you will play in each ecosystem.
There are generally 3 different roles your company can play in an ecosystem.
Ecosystem orchestrator
These companies take on the risk, complexity and also the challenges of building a digital ecosystem. These are companies like Amazon, Alibaba, Ping, etc. that enable others to join an ecosystem and sell goods and services through that system.
Modular producers
These are companies that contribute to the ecosystem and monetise value in different ecosystems. One of the best known modular producers is probably PayPal. Its service allows different platforms and ecosystems to use a common payment gateway so that customers can pay easily. A modular producer can add core services to ecosystems that meet the needs of consumers, businesses, and buyers and sellers.
Customer
The customer can be a person or a business that receives value from the ecosystem. When you book on Airbnb, you are a customer of the ecosystem that Airbnb has created and orchestrated.
Sometimes the lines are blurred. For example, someone who uses Facebook is both a creator (content) and a consumer (advertising). In addition, companies may use, orchestrate or add services to multiple digital ecosystems.
3 types of digital ecosystems
Functional digital ecosystem
This is one of the simplest ecosystems and is usually built around an existing product or offering of a company. It has a limited number of participating companies and partners (perhaps 10-100) and is very focused on the internal aspect. Due to its simplicity and ease of integration, it is also the most widespread ecosystem we can find in the world. However, there are also limitations as data collection and further integration is complicated as it is mostly a closed ecosystem.
Examples of these functional ecosystems can be found in the automotive industry, where platforms are combined with the digital services of the partners involved to create a very product-oriented ecosystem of a smart and connected car, usually limited to a limited number of products.
Platform ecosystem
More advanced ecosystems are digital platform ecosystems. They can involve millions of partners and a variety of digital offerings. This digital ecosystem is based on a ‘data first’ approach, using customer insights to develop new offerings or upsells based on the data gained. However, the key differentiator is the common platform on which all partners participate and create value. So the ecosystem orchestrator provides a common platform for all connected parties to work together.
Google Home is a good example. Google provides a common platform where developers, manufacturers and engineers can collaborate to create home devices that use the Google Home platform to become connected and smart. Google itself develops devices such as the Home speaker, but partners can also use the platform’s ecosystem to offer their products and services.
Super platform ecosystem
One of the most complex and intricate ecosystem models involves integrating different platforms and leveraging different user journeys, including their data. Super Platform Ecosystems typically encompass many different industries and services and try to connect the entire user journey to the ecosystem as much as possible. Most super platform ecosystems today are owned by tech giants such as Apple, Google, Amazon, Tencent and a few others.
WeChat, the Chinese super-app, is a perfect example of the creation of a super-platform ecosystem. The app now covers all major aspects of users’ lives. It offers thousands of services and functions on a single platform, including everyday banking, social media, shopping, communication and more. With each new offering, WeChat is able to become more integrated into daily life, enabling better data collection that can lead to new offerings and “lock-in”.
Challenges and Risks of Digital Ecosystems
So far, we have seen that while digital ecosystems have tremendous potential for value creation and growth, they also bring with them a unique set of challenges and risks due to their size and complexity.
In the wake of various current scandals, one of the key issues is, of course, data privacy and security. Given the vast amounts of data being tracked, shared and processed within the ecosystem, there is a significant risk of data breaches, misuse and, of course, cyber attacks that want that data. In addition, reliance on one or a few platform providers can lead to monopolistic control, which in the long run limits competition and innovation, and current trends are to prevent this through regulation.
There is also a risk for ecosystem providers (modular manufacturers) of becoming too dependent on the ecosystem for their business, making them vulnerable if the ecosystem fails or changes significantly. We have seen such problems for communities and businesses with Twitter and Reddit.
A bigger challenge for an ecosystem orchestrator, but also a risk, is the interoperability of the different technologies and systems within an ecosystem. Inconsistent or incompatible technology standards can have a major impact, so it is not surprising that Google, Facebook, etc. set and develop their own technology standards.
Depending on the business model, regulatory requirements are also a challenge. As digital ecosystems are complex and global, and regulations on privacy, compliance, antitrust and other relevant policies need to be constantly monitored and implemented, countries are often excluded from various services.
Regulatory challenges and antitrust concerns
As digital ecosystems continue to grow in size and influence, they are coming under increasing scrutiny from regulators and antitrust authorities around the world. There are concerns that the massive scale and dominance of these ecosystems could stifle competition, limit consumer choice and lead to monopolistic practices. And there are many examples of recent cases where digital ecosystems and their power are being scrutinised.
The European Union has been at the forefront of regulating digital ecosystems. In 2022, the EU passed the Digital Markets Act, which aims to prevent gatekeeping practices by large online platforms and ensure fair competition. This law could have a significant impact on companies such as Google, Amazon and Apple, forcing them to make changes to their ecosystems, and many of the tech giants are being investigated under the DMA as of 2024.
Apple, in particular, has faced antitrust investigations and lawsuits over its tightly controlled ecosystem and App Store policies. In 2021, a US judge ruled that Apple must allow developers to direct users to alternative payment systems, challenging Apple’s strict rules and fees. The company also faces scrutiny from the UK’s competition watchdog over its mobile browser policies and potential self-preferencing within its ecosystem. And in 2024, the US launched further antitrust investigations.
Similarly, Google has faced fines and legal battles from EU regulators over alleged anti-competitive practices within its Android ecosystem and advertising technology. Regulators are concerned about Google’s dominant position in online advertising and its ability to prioritise its own services within the Android ecosystem.
As digital ecosystems continue to expand and touch different aspects of consumers’ lives, regulators are becoming increasingly wary of their potential to abuse market power and engage in anti-competitive behaviour. Companies operating in these ecosystems must navigate a complex web of regulations and antitrust laws that could force them to make significant changes to their business models and practices.
Digital ecosystem trends of the future
As we enter the age of digital ecosystems, the landscape is rapidly evolving. Tech giants have shown what is possible, driven by technological advances and changes in consumer behaviour. One of the key trends shaping this evolution is the increasing dominance of ‘data-driven ecosystems’. These ecosystems use vast amounts of data to optimise the user experience, streamline operations and create new value propositions – think Facebook, which owns data on all customer interactions on Facebook, Threads, Whatsapp, Instragram, etc., and Google, which owns the ecosystem of search intent across information, video and more. But there are some other trends:
- Dominance of data-driven ecosystems: In the coming years, data will play an even more central role in digital ecosystems – especially with the rapid advances in AI. Companies that use this data effectively can gain unparalleled insights into customer preferences, behavioural patterns and market trends, or create leading-edge AI models based on their own data.
- Integrate emerging technologies: Emerging technologies such as artificial intelligence (AI), blockchain and the Internet of Things (IoT) will play a critical role in the development of digital ecosystems. AI and machine learning can analyse huge amounts of data more efficiently than ever before, opening up new opportunities for personalisation and automation.
- Greater focus on privacy and security: As digital ecosystems become increasingly data-centric, there are growing concerns about data privacy and security. Companies need to invest in robust security protocols to protect sensitive data and maintain user trust. This also means that an increasing number of ecosystems will close themselves off and prevent other third parties from using their rich databases and information. As a result, 2nd movers and non-ecosystem participants will come under pressure and close down ecosystems, as Apple has done.
- Cross-industry collaboration and convergence: Non-global ecosystems are likely to see more cross-industry collaboration as companies seek to create more comprehensive and integrated experiences for users. For example, partnerships between healthcare providers, technology companies and insurers could lead to holistic healthcare ecosystems that offer personalised healthcare services based on individual health data.
- Sustainability and corporate social responsibility: As societal interest in sustainability and ethical practices grows, digital ecosystems need to be aligned with these values. This could include using technology in ways that minimise its impact on the environment, promoting sustainable consumer behaviour through the ecosystem, and ensuring that the benefits of digital transformation are accessible to all parts of society to bridge the digital divide.
Verdict
While it’s easy to explain why these digital ecosystems work so well and why data, customer centricity, etc. lead to greater wealth creation, we should never forget how difficult it is to build such ecosystems. It takes a broad customer base, consistent value creation, clear alignment of a diverse set of partners, customers and technologies, and a very agile mindset to create such an ecosystem.
It is of the utmost importance that companies and individuals understand the power and implications of the emerging digital ecosystems around the world, and also find ways to participate, create or interact with them in their own way, in order to harness their power and potentially build the next big thing.
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