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A startup is a lonely endeavor that never works alone. It works with a dominant player, whether in an app store like a marketplace or building on an existing platform like a wireless or a card payment network. Interoperability—the ability to plug into the dominant platform—is a core requirement for its existence. How the startup manages this interoperability determines its success.
If the platform is a party the dominant player is hosting, interoperability is how you get in. The quality of the invite depends on the type of interoperability you practice.
The Three Flavors
Interoperability has three flavors: indifferent, cooperative, and adversarial. The kind of interoperability your startup needs determines the execution risk.
Indifferent Interoperability
Most startups fall into this category. The dominant platform provider does not care what you do as long as you follow the rules they set. App Stores, Marketplaces like Shopify, SalesForce, and HubSpot, fall into this category. The price of admission is small, and it’s up to you to author your success.
You are a party guest about whom no one knows or cares. How you become the life of the party depends entirely on you. As long as you don’t break anything or offend anyone, you get to enjoy certain privileges.
Cooperative Interoperability
Less common, cooperative interoperability is when the provider of the dominant service works with your startup to build standards that allow for interconnectivity. Unlike the App Store, where the provider takes a hands-off approach and lets you battle for market share, here, the dominant provider is invested in your success.
At this party, the host actively connects you with other guests and ensures you’re having a good time because your success is their success.
Adversarial Interoperability
The riskiest form, adversarial interoperability allows for using an existing network in a way that the maker of the network did not intend. This usage pushes the boundaries of what the network does without necessarily breaking its rules of engagement. While such startups are unorthodox, perhaps even unwanted, they are not illegal.
This is the party you snuck into, found your way to their wine cellar, and opened a rare vintage. Not only that, you’re actively stealing their guests and encouraging them to go to a party you’re hosting. It’s all fun and games until the host finds out.
While adversarial interoperability is a great business model for startups, it is perilous. You are fighting a powerful and well-funded incumbent. The owner of the dominant service has deep pockets and will use everything at their disposal if they think you’re about the eat their lunch.
Aereo is a cautionary tale.
The Aereo Story
Streaming TV Startup Aereo aspired to give everyone the ability to watch free-to-air TV on demand. To enable this, they provided a cloud-based DVR and rent-an-antenna service that allowed you to store your programs and stream them anytime. It checked every box on the interoperability checklist.
The existing service was free-to-air. In other words, the viewer had access to the programming via a local antenna and a personal DVR. Aereo merely managed their setup and let them access it anywhere on the Internet. Having a farm of tiny antennas storing programming to individual DVRs is not what the network programmers had in mind when they started broadcasting. Nevertheless, Aereo did so and got early traction. The service got rave reviews from The Wall Street Journal and, at its peak, had 80,000 users.
Almost instantaneously, Aereo was taken to court. It didn’t matter that they took something free and made it more accessible. It was a nonstandard use of the network, and the networks argued that it was illegal based on copyright laws. The case made it to the US Supreme Court, and the provider of the dominant network (CBS, NBC, ABC, and Fox) won.
Despite backing from Barry Diller’s IAC, Aereo filed for Chapter 11 Bankruptcy and sold its assets to Tivo.
Sometimes, a business model doesn’t fit neatly into an interoperability framework. WhatsApp is a good example.
The WhatsApp Example
When you install WhatsApp, it uses the phone numbers in your contact list to find other WhatsApp users you may know. It rides on your data plan and, unrestrained from most regulations, can offer rich messaging, including media, group chat, delivery confirmation, and read receipts.
Let’s walk through that again.
WhatsApp uses phone numbers—a userid it does not own or create—on a network it doesn’t own or operate, to build a messaging platform that, in most countries, beats SMS as the dominant form of messaging.
In so much that WhatsApp is freely available on app stores, it is a textbook case of indifferent interoperability. Over 400 million users actively used it before Meta (Facebook) bought it for $19 Billion. Yet, it destroyed SMS and MMS in many countries, thereby robbing the carriers of SMS revenue. That would make it look adversarial.
In the end, everyone in the ecosystem benefitted from WhatsApp. Not only the founders, investors, and employees of WhatsApp, but also the carriers who benefited from the increased data usage that WhatsApp generates with all the videos and images that are shared and re-shared multiple times over.
While the Carriers didn’t expect WhatsApp to become the dominant messaging medium, they didn’t shut it down as everyone benefitted in expanding the wireless network usage.
Finally
Not all interoperability is a zero-sum game. Even if the startup and the incumbent are adversaries, everyone can succeed if both are rewarded handsomely. The key is for the user of the service to get a better deal because of the interoperability.
Over the next few weeks, we’ll discuss how one of last year’s largest M&A deals in the CPaaS space is an example of interoperability. The story of two disrupters that crashed the party and changed its tone and conversation.
I would love to hear your thoughts. Share them on LinkedIn, Twitter, Instagram, or Substack.
Author’s Note: This is the first installment on interoperability. Links to the entire series: I, II, III, IV, V, VI