Value Migration and Defense Strategies

In many industries, firms adopt external technologies that improve their products but also generate complementary revenues for the technology developer. In this paper, we study a formal model to examine how competition between adopters affects the distribution of value created by such technologies and how adopters can respond to potential value migration---i.e., a shift in value capture from the firms to the developer. We find that value migration depends on the structure of value creation: it occurs when the technology primarily creates value at the consumer level, but not when it creates value foremost at the developer level. In the former case, sellers are in a Bertrand supertrap (prisoners' dilemma): adoption is strategically necessary but reduces sellers' profits. We then study two strategic responses: Defend investments, where sellers develop their own technologies, and embrace investments, where sellers enhance the developer's technology. Defend investments improve sellers' outside options and reduce value migration. Interestingly, this only occurs if the developer's technology exists; instead, without the technology, defend investments dissipate profits. Embrace investments have heterogeneous effects: improvements that increase consumer value intensify competition and exacerbate value migration, whereas improvements that increase complementary revenues can mitigate it. We also find that defend investments are particularly effective if the rival uses embrace investments in complementary revenues. Finally, we study competition between developers and show that it does not necessarily benefit sellers: when consumers are tied to specific technologies, systems competition can exacerbate rather than alleviate value migration.