Commoditizing Complements: Business Strategy Explained

Understanding Complements

A complement is basically a product that depends on another product to deliver full value. Think of cars and fuel, or printers and ink—you can’t really use one without the other.

Now imagine we have Product A and Product B as complements. Consumers allocate a certain value X between the two goods. A company has two strategic choices:

• Sell both A and B and capture the whole value X (this could be through vertical integration).
• Dominate in the market of A while making B cheap and widespread—so that most of the value flows back to A.

This second approach is what we call commoditizing complements.

What Does Commoditizing Complements Mean?

In simple terms, it’s about making complementary products as cheap, accessible, and widespread as possible.

Here’s why:

• When the price of a complement drops, the demand for the main product usually increases.
• To reduce the price of complements, companies encourage heavy competition among suppliers or developers producing those complements.
• The ultimate goal? Push complements down to a commodity price—where goods are indistinguishable and margins are razor thin.

This allows the primary product (the one a company really wants to dominate in) to capture maximum value.

Understanding Value Chains and Distribution of Value

The value chain is a framework used to describe how an industry and the businesses in it are organized.

Michael Porter, in his book Competitive Advantage, defined it like this:

So, an industry can be seen as a sequence of suppliers, producers, and distributors. Traditionally, competitive strategy focused on:

• Competitors
• Suppliers
• Customers

This was captured in Porter’s famous Five Forces Framework (1979):

• New entrants
• Suppliers
• Buyers
• Substitutes
• Competitive rivalry

But in the mid-1990s, the model was extended to include a sixth force—complementary goods.

Why Complements Matter

In the book Information Rules: A Strategic Guide to the Network Economy (1999), the authors emphasized:

In other words, value doesn’t get distributed equally across the chain. Some parts become extremely profitable, while others get pushed down into commodity status. And often, companies actively drive this process by commoditizing complements.

Classic Example: IBM vs Microsoft

Joel Spolsky explains this perfectly.

• IBM’s Strategy: When IBM designed the PC architecture, they used off-the-shelf parts instead of custom parts and documented all the interfaces. This allowed other manufacturers to make compatible add-ons (like memory cards, hard drives, printers). IBM’s idea? Commoditize the add-in market (a complement to PCs). Cheap add-ons drove demand for more PCs.
• Microsoft’s Strategy: IBM licensed PC-DOS from Microsoft, but Microsoft cleverly kept it non-exclusive. That meant they could license it to Compaq and other PC makers who cloned IBM’s machines. Very quickly, PCs themselves became a commodity—prices dropped, power increased, and margins thinned.

But who benefited most? Microsoft, because demand for PCs meant exploding demand for their complement—MS-DOS.

Modern-Day Examples of Commoditizing Complements

Example 1: Google and Android OS

Google distributes Android OS for free to handset makers. Despite Android being the world’s leading mobile OS, Google doesn’t earn directly from it. Instead, it earns when users interact with Google services—like Play Store, APIs, and advertising—embedded in Android.

By making Android free, Google:

• Reduced costs for phone makers.
• Increased competition among manufacturers (lots of Android devices in the market).
• Drove massive demand for its core business: web-based services and ads.

If Android weren’t free (like iOS), we wouldn’t see the same explosion of smartphone brands today.

Example 2: Apple and the App Store

In the smartphone value chain, you have:

• Hardware manufacturers (chips, batteries, devices)
• OS developers (iOS, Android)
• Application developers (apps)

When Apple launched the App Store, it essentially commoditized applications. By making it easy for anyone to build and distribute apps, Apple created:

• Fierce competition among developers (apps became cheap).
• A huge variety of apps, driving users to buy iPhones.

And Apple still took a ~30% cut on every paid app. Remember their early slogan? “There’s an app for that.”

By commoditizing apps, Apple boosted demand for its core product—devices.

Example 3: Tesla and Open Patents

In 2014, Tesla opened up all its patents for free use. Elon Musk argued this would grow the electric vehicle (EV) market faster.

At the time, Tesla was producing only ~40,000 cars annually. Today, even with production in the hundreds of thousands, EVs still make up less than 2% of global car sales.

Tesla’s real competition isn’t other EV makers—it’s the millions of traditional combustion cars.

By giving away patents, Tesla aimed to commoditize EV technology so more companies would enter the market, grow the ecosystem, and indirectly drive more demand for Tesla’s cars and infrastructure.

Wrapping Up

The idea of commoditizing complements is a powerful strategy in business. Companies don’t always compete by making their own products better—they sometimes win by making complementary products cheap, common, and unavoidable.

• IBM commoditized add-ons to sell more PCs.
• Microsoft commoditized PCs to sell more operating systems.
• Google commoditized smartphone software to grow its ad empire.
• Apple commoditized apps to sell more devices.
• Tesla commoditized EV patents to grow the electric car market.

In the end, the real game is not just competition among substitutes—it’s about controlling where the value flows in the entire chain of complements.

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