Autorización y Ejercicio de Crédito Registro y

The primary unit of transaction cost economics is the transaction. In the Business Software domain transactions are manifested as license sales, while in affiliate marketing they may be visits, leads, or sales, depending on the commission structure for a given merchant program. Meanwhile, a core characteristic of ecosystems is diversity. While the ecosystem could not survive without revenue, without diversity the ecosystem would not be considered “healthy” (Iansiti and Levien 2004). We have observed that an excessive focus on transactions as the primary measure of value causes some degree of conflict in the affiliate marketing ecosystem; merchants tend to focus on measuring the sales which result from affiliate activities, but place little emphasis on the activities used to generate these sales. This likewise occurs in the Business Software ecosystem, where the core firm measures partners based on core license sales. However, what truly increases diversity and improves the health of the ecosystem are the number and variety of complements created. Complementors bring their unique expertise and business focus, and also their ability to address a wide

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range of customer needs which otherwise would be extremely difficult and costly for core firms to identify and satisfy.

In transaction cost economics, variation is considered a threat to the stability of an interorganizational relationship. Since the primary governance mechanism is the contract, exchange uncertainty is associated with the problem of incomplete contracts, resulting in an adaptation problem when there is variation in the exchange circumstances. However, in the ecological literature, diversity increases the ability of a system to absorb external shocks and to innovate productively. While variability in the quality of goods and services exchanged in the system may be considered negative, diversity in the types of goods and services provided represents positive variability. Niche creation is a measure of an ecosystem’s ability to create meaningful diversity in a business ecosystem (Iansiti and Levien, 2004).

Findings 3a and 3b in the prior chapter address the issue of creating measures to encourage and manage diversity, or heterogeneity, in the ecosystem while limiting variation in quality. We have suggested that both creation and control mechanisms should be designed with the intention of reducing quality variance, while creation mechanisms should be designed to maximize heterogeneity. When there is a high level of heterogeneity, however, the challenge of matching supply and demand becomes more difficult. Search and coordination mechanisms serve to create greater cohesion within a diverse ecosystem. In the Business Software ecosystem, participation from the community in such measures as forums, ratings systems, case studies, and recommendations helps ensure meaningful diversity by strengthening the reputation of partners and complements of high quality, and penalizing those which are of lesser quality.

We have also observed that core firms may either take an active or passive role in determining the degree of heterogeneity in the ecosystem. In the Affiliate Marketing domain, merchants generally take a passive approach, accepting most affiliate applications and providing few restrictions of the activities used to generate transactions. We did note certain cases where management was more active, such as the case of a major financial institution which preferred to accept affiliates focused on travel and entertainment, and tended to reject those whose core business was based

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on financial services. The motivation in this case was to limit direct comparison between the merchant’s products and similar financial products.

Furthermore, we observed various approaches to heterogeneity in different business software ecosystems. As part of the research of the Business Software domain, we conducted interviews with two other manufacturers in the enterprise software sector with different profiles from the Software Vendor of our study. While both were manufacturers of enterprise resource planning software for small businesses and therefore direct competitors with the Software Vendor, one of these other businesses delivers an open source product and relies heavily on community- based development and distribution, while the other produces a proprietary software product and exercises a much higher degree of control over their partners. For the Software Vendor discussed in chapter 3 (which we considered to pursue a middle ground between the other two approaches to control), we found that the core does not pose limits on the number of partners, nor on the type of activities they engage in or whether or not they develop complementary software solutions. The risk of this strategy is that some geographic regions and vertical or horizontal sectors may be saturated with partners and with complementary solutions, while others may have relatively few. The Software Vendor relies on market forces to drive partners towards sectors where there is the greatest need and away from those where competition is excessive. The community also plays a vital role in aggregating demand and rationalizing supply.

In contrast, the manufacturer which maintains tight control actively selects new partners based on their capabilities in a region or vertical or horizontal sector, and rejects new partners working in an area which is already saturated. This active approach both ensures high quality partners and complementary solutions, as well as ensuring a healthy diversity in the offering available to customers. It might be argued that this strategy requires the dedication of greater resources from the core firm, and relies less on the capabilities and insights of partners who are closer to the end customer. This also may limit the efficiency of market forces in determining which partners and complements will be successful, and may block access to many partners

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and complements which might have a greater chance at success in a more open system.

The core firm in the open source software ecosystem currently takes a passive approach, allowing partners and developers of complements to self-select, and for the market to decide which are successful. The CEO of this firm confirmed that this was out of necessity due to the company’s limited resources and the need to grow quickly. However, he did express the desire to take a more active approach to controlling the heterogeneity of the ecosystem once the company reaches a more mature stage.

Encouraging heterogeneity in the ecosystem may have negative consequences, though. In both the Affiliate Marketing and Business Software studies we observed that while the core firms were effective in monitoring transactions, they had difficulty monitoring the behavior of participants in achieving those transactions. In both cases there was a dearth of formal mechanisms (such as incentives or terms in the formal contract) prescribing acceptable and prohibited behaviors. This may be due to cost considerations, a lack of effective monitoring technology, or some other effect which we have not observed.

4.4.5 Legitimacy and Status

In Finding 3.4, we observe that the ecosystem core confers legitimacy and status to participants and complementors on the periphery in graduated levels, with participants receiving greater legitimacy and status the closer they position themselves to the core. This was evident in the Business Software ecosystem as partners participated in co-branding and marketing activities, co-sponsorship of events, and coordinated development activities, all of which served to tie the reputation of the partner more closely to the core.

In the Affiliate Marketing ecosystem we observed a similar phenomenon. While affiliates choose which merchants to promote for many reasons, the most important include commission rates (24%), program management (23%), and brand awareness (23%) according to a recent survey of 450 affiliates by AffStat (2009). In this case, brand awareness may be considered a proxy for legitimacy and status. By accepting an affiliate to a merchant program, and allowing the affiliate to use the merchants’

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marketing materials and trademarks, legitimacy and status associated with the merchant brand is conferred to that affiliate. In chapter 2, we suggested that the transfer of brand equity could have negative consequences as well. If an affiliate engages in illegal or unethical practices, this negative activity may become associated with the merchants that they represent while engaging in such practices. Our conclusion was that while merchants are generally effective in their monitoring of outcomes, they should be more vigilant in their monitoring of affiliate behavior. In other words, the sole focus on transactions runs the risk of negative affiliate behavior harming the legitimacy and status of the merchant. The graduated control levels in affiliate marketing are the primary mechanism used to reward and punish affiliate behavior. High-performing affiliates are promoted to a higher commission level, and those who engage in negative activities are punished by lowering their commission level or excluding them from the program altogether.

Agency and transaction cost theories view the contract as the primary mechanism for controlling the exchange relationship, but negative activities on the part of the agent (in the above case, the affiliate) not contemplated in the contract may still impact negatively on the principal (the merchant in this case). However, these negative activities would not constitute non-compliance unless they were expressly prohibited in the contract. Therefore, we observe a gap in the ability of traditional economic theory to explain this phenomenon, and see the need for further exploration.