Digital transformation under risky investments and incentives to host rivals on proprietary platforms

In this paper, we study the decision of traditional firms to pursue a digital transformation strategy. While digital transformation enhances value through external value creation, it also makes investments risky. We show that when the investments are very risky (after digital transformation) and the value of cross-network interactions is not very high, firms should avoid transforming to a platform and remain as a traditional firm, otherwise digital transformation is profitable. Interestingly, when firms transform into a platform, we show that inviting rivals onto their platform can be profitable in most cases. Furthermore, in some cases, the platform may even pay rivals to join its platform. Apart from the benefit of enhancing the volume of cross-sided network interactions, inviting rivals onto their proprietary platforms lowers the rival's aggressiveness. This is a novel strategic rationale for inviting rivals onto the platform elicited in this paper. Instead, when the value of cross-sided network benefits is very high and investments are almost certain, the platform may choose not to invite rivals. We provide clear managerial implications of our results