If you think about the tech companies that have transformed our daily lives today, you think Uber, Amazon, Airbnb, Facebook, Wikipedia, LinkedIn. The common thread between these companies? One of them is the fact that these are all platform-based businesses.
What exactly are platforms? A platform is a two-sided market that uses technology to connect people, organizations, and resources in an interactive ecosystem, where unbelievably huge amounts of value can be created and exchanged. Some of the top businesses as measured by market capitalization—Apple, Amazon, Google—all run platform businesses. The platform provides an open, participative infrastructure for the interactions of enabling matches amongst users and facilitating the exchange of goods, services, social currency, whatever it may be, which creates value.
Why Platforms are so Disruptive
If you think about it, mankind have always gravitated towards the concept of a platform. The earlier concepts of a platform have been the open-air marketplaces and auctions found in villages in Africa and Europe to the stock market. It promotes community, it exchanges value, and this synergistic aspect has really been essential to the sustainability and advancement of our society. What this book primarily focuses on is the digital platforms and how technology has enabled the scalability of these traditional platforms to massively turn over incumbents in certain industries.
From reading the book, I took away that there really are a lot of sources of power and advantages that these platforms have, just based on their structure. There are lots of different details that the book discusses but in summary, there are 5 major takeaways of why platforms have eaten pipeline businesses.
- Platforms wield network effects.
Network effects, or demand economies of scale, are a new economic phenomenon driven by technological innovation that simply means the impact that the number of users of a platform has on the value created for each user. Network effects can be positive or negative—positive network effects occur when the benefits received by users when the number of users increases, negative network effects vice versa. For example, Adobe’s image production and sharing platform creates more value when more users are signed up on the platform because it allows for a greater community of image production and sharing. However, if a platform gets too crowded that there is a spirit of competitiveness, this could be considered a negative network effect. For example, users on a platform called Covisint, which connects businesses that are interested in developing cloud-based networking tools with service providers, could face negative effects of a tight competition, if there are too many users on this particular platform.
- Platforms eliminate gatekeepers.
Within a pipeline business, there are inefficient gatekeepers or “stops” along the vertical supply chain. A traditional book publishing firm has editors who select a few books from those submitted to them and then read them and approve them while hoping that the ones they’ve selected will become the next NYT bestseller. Whereas Amazon’s Kindle platform allows almost anyone to publish a book, and relies on real-time consumer feedback to distinguish whether a book will succeed or fail. There is a greater freedom and availability of different products for the consumer to choose from and the process of creating something on the supply-side is made significantly simpler.
- Platforms unlock new sources of value creation and supply.
Hotel chains have traditionally built value and growth by adding and tending to their real-estate, scouting for more promising territories or investing in increasing and bettering their property. Airbnb, a younger company than Marriott or Hilton, is considered more or less as competitive with these hotel giants—except Airbnb doesn’t own any hotels. It relies entirely on the sharing economy for supply and value creation, which means that it could effectively cut both the fixed and variable costs of buying and maintaining property.
- Platforms (digital) use data-based tools to create community feedback loops.
The popular quote in the Internet economy: “Data is the new oil” is really what this core factor is about. Platform businesses rely on feedback loops, gathering community signals about the quality of content or service, and they can use this data to leverage a variety of different things such as eliminating any products that have received negative feedback or tailoring personal objects to a specific customer or refining interaction mechanisms to best suit people’s needs. This makes market exchanges endlessly more efficient.
- Platforms have inverted the firm.
A platform’s value originates from the community of users and so with this kind of business model, platform businesses must turn inside out its different functions—from marketing, operations, information technology, and strategy, to focus more on the people, resources, and functions that exist outside the business, which would complement or replace those that exist within a traditional pipeline business. Platforms blur business boundaries, they focus more on ecosystem governance more than product optimization.
Some Extra Complications.
With that being said, the book also talked about the various other complications that come with building a platform all from how to design the architecture of your platform business in a way that will pull, facilitate, and match users, how to monetize such platforms in a way that will not deter off users without creating a loss of profit, how to wrestle with the issue of openness—or allowing what users can and cannot do. The latter was interesting in particular, and it tied in with its chapter on governance and policy, which talks about dictating a set standard of behavior for these platform businesses as well as certain policies regarding data privacy, labor regulations, fair pricing, that regulate these very free, open market conditions so to ensure the healthiest and most beneficial effect to the business and society as a whole (Facebook-Cambridge Analytica data scandal, anyone?)
Overall, I thoroughly enjoyed reading this book and its informative details filled with different infographics, graphs, and tables that really explain and digest different concepts associated with the platform business. I highly recommend it to anyone who wants to learn more in-depth about the reasons why certain companies and their models have become so explosive and maintained their adaptability in today’s ever-changing technological landscape.