Platforms: The Revolutionary Business Model

Platform Revolution Summary

Over break, I read the aptly-named and action-packed book, Platform Revolution by Geoffrey Parker, Marshall Alstyne, and Sangeet Choudary, which tackles the platform phenomenon. Today, traditional companies and their business models are being phased out by the rapidly-scalable platform company, a business built on facilitating value-creating exchanges between consumers and external producers (think Alibaba, AirBnb, and Uber). Using captivating stories from business, history, and academic research, the authors not only explain the fundamentals behind today’s leading platforms, but best practices for the art of designing a successful platform as well.

The book opens up with an introduction to platforms and an explanation for its massive impact on our world today. Through a fascinating comparison between the rise of monopolies in the industrial era and today’s internet era, the authors argue and quite elegantly explain that the growth generated by supply economies of scale is far outpaced by the demand economies of scale created by platforms. Using AirBnb’s feedback loop as an example, where hosts attract guests and guests attract hosts, the authors explain that these platforms are built on two-sided networks with two sources of demand, consumers and producers, and growth on one end of the market leads to growth on the other. Ultimately, they boil this competitive advantage down to the idea of network effects, the notion that the value of a platform increases non-linearly as its size increases. From there, the authors utilize this notion of network effects as the basis of their specific analyses and insights.

Continuing their technique of bolstering theoretical concepts with real-life anecdotes, the middle chunk of the book delves into the practical considerations when designing platforms. In particular, the authors provide insights, case studies, and recommendations surrounding these essential platform design considerations:

  • Launch
  • Monetization
  • Balancing Platform Openness and Closeness
  • Governance
  • Measuring Success

Though each chapter touches on a unique aspect of platform design, the specific recommendations center on good design principles and are geared towards creating a user-centric platform, generating capturable excess value for users, and reinforcing network effects. Through case studies of failures and successes, the authors illustrate the importance of different platform design considerations and prove that designing platforms is more art than science.

Finally, the book looks at the future issues and influence of platforms in our world. By focusing on the novel nature of the platform business model, the authors point to the unique regulatory challenges that face platforms. In providing frameworks to think about these regulatory challenges, they implore policymakers to rethink old regulatory practices, to distinguish between market domination and abuse of dominance, and to have a nurturing light-touch regulatory policy. The final chapter points to both future industries ripe for platform disruption and to future challenges. Using history, the authors send off readers thinking about the industrial revolution and the different responses that emerged from its developments (like the union movement). Why? Because they argue that the platform revolution will ultimately cause massive social, economic, and political changes that we as a society will soon face and be forced to respond to.

The Chicken or the Egg?

Picture this: Facebook has a single user on its newsfeed, Uber can only connect you to one driver, and AirBnb has a sole listing. It’s hard to imagine these scenarios today because these platforms have built such vibrant and massive networks around themselves. It seems obvious that these platforms don’t begin as robust communities and networks, but how do you actually develop these two-sided networks?

For Uber, who do you go after first? Drivers? Riders? You can’t have one without the other, so that’s why I found the chapter on the chicken or egg dilemma to be the most fascinating. The book breaks down eight specific strategies on launching a platform, but these four were the ones I found most interesting:

  1. Follow-the-Rabbit Strategy: Using a non-platform project to model success and attract both consumers and producers to your platform. Amazon started off as a non-platform project that proved its success and then converted itself into a platform by launching the Amazon marketplace that attracted merchants and consumers.
  2. Piggyback Strategy: Leveraging the existing user base of a different platform to create value and attract those users to your platform. PayPal leveraged the eBay network to attract both merchants and consumers to its platform.
  3. Seeding Strategy: Creating value units on a platform at launch to spur network development. Google launched Android by seeding the app market with $5M in prizes for developers that created the best apps – this incentivized developers to create applications and attracted users to the growing Android ecosystem.
  4. Micromarket Strategy: Launching in a smaller market that already engages in the value-creating interactions. Facebook launched in the small community of Harvard, which ensured that the platform would have an engaged community from the start.

This chapter is not only relevant to a platform launch, but relevant to platform growth as a whole. As we learn more about the growth strategies of different tech companies as they relate to user acquisition, it’ll be important to think about the changes they’ve had to make to their initial strategy as they’ve scaled, the different incentives they deploy, and the foundational principles behind them. It’ll be interesting to hear about how each company we visit thinks about the different sides of its networks and the dynamics between those two sides when it comes to user acquisition.

To Read or Not to Read?

When we think of platform companies today, it seems almost obvious why it makes sense and works. However, if I were to ask you to explain why, it’s actually quite difficult to articulate. To my surprise, this book articulates and explains both the general and highly-specific elements of platforms quite effectively. From the architecture and impact of existing platforms to launching, monetizing, designing, and managing new platforms, the authors delve deeper into the world of platforms in each chapter.

A bit overwhelming at times, this book tackles so many different issues because it is effectively a comprehensive guidebook for platform designers that they can use to expand existing platforms or develop new ones. Even though certain details can get lost due to the overload of information,  I think this book is a must-read since it touches on the platform revolution that is fundamentally changing our world today; the principles of platforms are not only important to those that design, but to those that are affected by it as well. Moreover, I found the real-life anecdotes that the authors used to be the most insightful and interesting aspect of the book. These anecdotes developed my overall business acumen since they taught me the specific mistakes that led to the corpses of former technologies, like Myspace and Betamax, and the novel solutions that led to the tech giants we know, love, and hate today.

3 thoughts on “Platforms: The Revolutionary Business Model

  1. Hey Erik!

    I really enjoyed your deep dive into “The Chicken or the Egg?”. I think the strategies you outlined prove that great platforms require great masterminds to succeed. Additionally, the comparison to the Industrial Revolution is quite thought-provoking. I wonder if the companies we are visiting see it that way.

    Liked by 1 person

  2. Nice summary of the book. I’ve read this one, and your assessment pretty much lines up with my own reading. I think it is extremely thorough and comprehensive treatment of the phenomenon. At the same time, it reads more to me like a laundry list of how companies have done platform strategies in the past, rather than an elegant framework. Glad you enjoyed it. If you didn’t notice, the authors are professors over at BU.

    Liked by 1 person

  3. I may have to buy this book for myself after your summary! I am really curious as to read about what industries the author believes will be disrupted next by the platform revolution. Companies such as Uber and Airbnb have really made our lives more convenient or given us access to utilities that was nonexistent before. I imagine it would take a really innovative mind to envision these value-creating exchanges and realize that people would like to use it.

    Like

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