Much was made in the early 2000s of the need for companies to focus on entire vertical solutions, even if they don’t own the entire system. For example, a producer of carrots that sells to a bagger of frozen vegetables must consider that bagger a partner in a vertical system, even if he is an adversary in annual contract negotiations. If the carrot producer doesn’t consider things in that way, then he may “bite the hand that feeds him” and secure deals that are so bad for his downstream partner that the stream dries up.
The chart above is derived from one produced by Robert Trent of Reed Elsevier for an article in March 2004 Supply Chain Management Review. It will become important for those of us doing business in the social media space, particularly those of us who operate on top of or supply APIs. To consider what Trent has laid out and how to partner with those upstream or downstream of us. In the bullet points below, I’ll walk through an example of each type of relationship and the repercussions for each party. For these examples I’ve made it simple and made the downstream partner the one whose name is associated with the content provided and the upstream partner is the one supplying a service that enhances or makes possible the downstream service.
- Strategic Example: Facebook partnering with Microsoft for search and ad sales.
- Description: The advantage to this agreement for downstream companies is that they get some active control of how their supplier implements its solution. In some cases, as with Facebook and Microsoft, they may also get paid a premium for setting up a strategic alliance. There’s high risk in partnering with a single (or few) partners though. The partner could fold or lose its good reputation. With a single partner there is also a stifling of potential innovation in the space. Upstream partners have similar risk exposures.
- Leverage Example: The early relationship between Twitter and Bit.ly (before t.co).
- Description: In this type of agreement, the consumer (downstream company) has many options to pick from, but its consumers find a lot of value in the service. The upstream company is very vulnerable in these types of situations. It can gain enormous amounts of market share and revenue by entering the agreement, but usually loses its shirt in negotiations.
- Transaction Example: Integrating Klout with a Twitter desktop client.
- Description: In this type of agreement the downstream company is faced with a limited number of options for a service that is not critical. What becomes essential is that the upstream partner limits transaction costs as much as possible. Since most of the API-based relationships are built without monetary cost, this means ease of implementation. There are few people (though there probably are some) begging for a desktop client that can verify users’ influence. Consequently, HootSuite’s decision to integrate with Klout likely had as much (or more) to do with Klout reducing transaction costs as HootSuite needing the integration.
- Market Example: Finding advertisers for your site or blog.
- Description: Here, there are plenty of upstream options for the downstream provider. Selecting the right one may involve looking at a feature or two, but for the most part it means simply asking “what are you willing to pay?” or “what do you cost?” As with the transaction example, in the new world of social media, these costs are often non-monetary.
The lesson here depends on whether you’re the downstream or upstream entity. If you’re going to be a downstream entity, you should look at each relationship you’re forming and figure out which quadrant it falls in to. Once you’ve done this, you should treat the negotiations, contracts and suppliers accordingly. If you’re an upstream entity, you should think carefully about what type of company you want to be seen as (hint: there’s not usually a lot of money in the bottom right.)
