Businesses can increase demand, avoid competition, and capture a greater share of consumer surplus by “commoditizing” complementary businesses. For example, Microsoft commoditized PC hardware. As prices for hardware fall, demand for Windows goes up, so they can earn more. This also makes it harder for a competing organization to vertically integrate across the commoditized link in the value chain.
This pattern is repeated throughout the tech industry, in which products often involve many interacting layers. Uber commoditizes drivers; Amazon commoditizes merchants; etc. This is sometimes a good explanation for why tech companies invest heavily in non-remunerative initiatives (e.g. open source).
Compared to vertical integration, this strategy allows a company to remain relatively lean and focused; it can be performed incrementally; it often avoids the appearance of a mega-monopoly.
ucaetano, on Hacker News, commenting on Gwern’s article:
Another way that I like to express that is “create a desert of profitability around you”. I once had a strategy professor define the Google business model somewhat like that, where “Google tries to make every other business around it free or irrelevant”…A desert of profitability shifts consumers to you, and keeps competitors away.
Q. What is meant by “complement” in “commoditize your complement”?
A. A product usually bought with your product.
Q. In terms of prices, what is meant by “commoditize your complement”?
A. Driving the complements’ prices down to the commodity prices.
Q. What happens to your demand when you commoditize your complement?
A. It increases.
Q. Why does commoditizing your complement make it more difficult for a competing monopolist to emerge?
A. They can’t earn as much at adjacent layers, so it’s harder for them to vertically integrate into your layer.
Q. How did Microsoft commoditize its complement with Windows?
A. They commoditized PCs while retaining large margins on Windows.
Laws of Tech: Commoditize Your Complement · Gwern.net
Strategy Letter V – Joel on Software