Platforms, Ecosystems And Wealth Creation
Over recent decades platform business models have become a crucial part of the economy. Unlike traditional business models, which create and sell products and services, platform businesses facilitate and monetise transaction between different user groups. Here we will look at:
- What exactly is a platform?
- Are platforms new?
- How platform businesses operate
- Why some platforms perform well while others fail
- The disruptive effect of platforms
- Skills that platform start-ups need
- The future of platforms
What is (and what is not) a platform
Apart from being some of the most successful start-ups of recent times, Uber, Apple, Amazon, Airbnb, Facebook, PayPal and Alibaba are examples of organisations that operate platform business models. Rather than selling their own products and services, they focus on facilitating economic exchanges between different user groups. For example, in the case of Uber, the user groups are drivers and passengers, and with Airbnb, they are landlords and tenants. The core benefit that such businesses provide to their users is access to participants on the other side of the equation. For instance, eBay attracts participants to join, facilitates matches between buyers and sellers, and provides a transactional rule-based architecture where buyers and sellers can safely do business.
While platform businesses leverage technology, a platform is the business model, not just the technology. While incorporating technology, the value-creating component is the holistic business model that brings together users and suppliers.
Platforms and ecosystems
We can view this as a combination of platforms and ecosystems. A business ecosystem is the business community of interacting participants, while the platform is the integrating element that organises the interactions and creates additional value. In other words:
- Communities of interacting entities such as businesses, individuals, and organisations that produce value for one another, maybe by creating and consuming goods and services, are considered an ecosystem.
- A platform is a way of organising that ecosystem and facilitating interactions between its members to create value.
Compared to traditional linear businesses where suppliers create the product or means of production, it is relatively easy and inexpensive to scale platform businesses. In a linear business, the inventory appears on their balance sheet, while this is not the case with a platform business.
Surprising as it may seem, Netflix is a linear business and not a platform business as it owns the licences of the content that it streams. Also, many SaaS businesses that market themselves as platforms, for instance, Amazon Web Services, are linear businesses that sell in-house developed products and services to multiple users.
Platform businesses are as old as the hills
In our highly connected world, we tend to think of platform businesses as new and modern, the natural extension of modern technology and the internet. However, we have been operating platform businesses for as long as human civilisation has existed. Ancient marketplaces and auctions held in Ancient Egypt and Rome were all platform businesses, as are today’s shopping centres and malls. However, it is only in recent times that platform businesses have become so dominant.
Yet only recently have they dominated the economy
Since the turn of the 21st century, platform businesses have grown exponentially and have overtaken linear businesses in leading the economy. Eight of the ten wealthiest companies are platforms, and globally around 60% of unicorn start-ups (start-ups worth over a billion dollars) are platforms.
This exponential growth has, of course, been fuelled by digital technology, but as we have indicated, it takes more than just technology to create a platform business. Technology makes creating platform businesses a much more straightforward and economic process.
The essence of a platform business
Platform businesses generate value through the core transactions they facilitate, thus optimising the core transaction elements of the platform is critical to success. These include:
- Building an audience
- Bringing together users and suppliers
- Providing the tools and services needed to facilitate the transactions
- Setting and enforcing rules, protocols, and standards
There are many different kinds of platforms. Some examples are:
- Technology platforms are not actual platform businesses as they market their own technologies to multiple users. However, they are often considered as such, even though they don’t connect platform participants. Examples include Twilio, Microsoft Azure and Amazon Web Services.
- Computing platforms connect users and third-party developers, typically through an app store. These may start with a parent building the technology side of the platform before launching it to third parties. For instance, Apple developed its initial iPhone apps through partnerships with other businesses, increasing the user side before opening the platform to third-party developers. Google did the opposite – they grew a developer network before launching an Android phone.
- Utility platforms such as Google and Bing attract users by offering free services. Once the user phase is established, they open the platform to advertisers.
- Interaction platforms such as Facebook, WhatsApp, LinkedIn and bitcoin facilitate interactions between users. Such interactions could be text, voice, and money transfer. The network builds organically as users attract more users who attract more users and so on.
- Marketplaces such as Amazon, eBay, Airbnb and People-Per-Hour connect the supply side with the demand side. The supply-side sets the prices, and the network builds organically with suppliers attracting buyers who attract more suppliers.
- On-demand platform services such as Uber deliver services fulfilled by independent suppliers, for instance, passengers and drivers.
- Content crowdsourcing platforms such as YouTube and TripAdvisor collect content from various users and share it with a broad user audience. Additional content attracts additional users.
Creating a platform
Adopting a platform business model is easy if you are a start-up. As we have shown, most unicorn start-ups did precisely that. Of course, not all have been successful; many platform start-ups have failed to take off or have eventually fallen by the wayside - think Friends Reunited and Sidecar. So what differentiates a successful platform and one doomed to failure?
Why platform start-ups fail
In his paper “Seven mistakes to avoid in launching and scaling digital platforms”, Rubén Mancha and his co-authors listed the following mistakes:
- Failing to create a seamless digital experience
- Failing to develop a vibrant ecosystem
- Failing to protect monetisation opportunities
- Failing to recognise and balance strategic options at three crucial pivot points
- Failing to exploit the synergy of digital and physical assets
- Failing to innovate beyond the digital experience
- Failing to follow emergent strategies
Wenhui Fu, writing on “The influence of platform service innovation”, categorised the main platform failure mistakes as:
- Mispricing on one side of the market
- Failure to develop trust with users and partners
- Prematurely dismissing the competition
- Entering too late
Other analysts have emphasised financial challenges, pricing, regulatory and legal issues, hubris, overconfidence and other personality traits of entrepreneurs. Overall, creating a successful platform is far from easy, and there are many obstacles to overcome.
How platforms disrupt linear business models
While platform businesses are becoming increasingly dominant, this is often at the expense of linear businesses. Most businesses are linear, for instance, manufacturing, traditional education, SaaS (where software is developed by the business and sold on a pay-as-you-use basis), and e-commerce are all linear businesses. Any business that adds value to products and sells them to consumers can be considered linear; in other words, value is created upstream and flows downstream. Such businesses seek an advantage over their competitors by leveraging their internal resources and providing their customers with channel access.
The platform business model turns this on its head. Platform businesses assemble hordes of connected users and resource ecosystems. For example, a traditional software business develops software that it sells to customers adopting a linear model. In contrast, a software business such as the Android app store leverages an army of developers to supply a much larger audience of users. The positive feedback of the user and developer network allows such enterprises to grow into behemoths.
So how can a traditional linear business survive in an increasingly platformed marketplace? The adage that if you can’t beat them, join them comes to mind. For instance, the software business we used in the example could refocus its internal expertise on developing its users’ capabilities. Thus, it could sell its products alongside those created by its customers, perhaps by creating building blocks that its customers assemble into products which it sells alongside its internal developments, thus relying on the network effect to grow. An alternative approach might be to build a network of similar developers which focuses on solving customer’s problems.
The power of the network effect rapidly increases the size of the customer base while driving down costs. When faced with competitors that strive to harness this power, surviving while maintaining a strictly linear approach may be too challenging. A hybrid approach that combines both linear and platform business models may allow a business to capitalise on its internal expertise alongside the power of the network.
Skills that platform start-ups need
As in all start-ups, strong personal skills, the ability to work long, arduous hours, and the willingness and ability to take on any role in addition to your niche are essential requirements. You also need to be able to get on with people; while geek culture still prevails in parts of silicon valley, people skills are in the ascendency. As a new employee, you must work well with the rest of the team while bringing a range of unique skills that will significantly impact the business. Here are some of the most important hard and soft skills you will need.
Hard technical skills
- Digital skills - whatever your specialisation, you need to be equipped with fundamental development skills:
- Back-end development skills such as python, Ruby, MySQL and PHP
- Full-stack developers capable of all front-end and back-end development are often crucial players in platform start-ups – it is said that Facebook at one time hired only full-stack developers.
- UI and UX skills – as platform businesses rely on end-user interactions with the company, products and services, user interface and user experience skills are highly sought.
- Sales and marketing skills are highly sought after. These include:
- Relationship marketing, including branding, social media, and influencer marketing
- Inbound marketing, including audience analysis and content creation.
- Digital marketing such as SEO and CPC, which both require strong analytics skills
- Direct marketing skills that focus on B2B interactions.
- Financial planning and analysis skills are the bedrock of successful start-ups. Good financial planners typically have excellent analytic skills and a deep understanding of business models.
Softer personal skills
- Initiative and resourcefulness are skills needed in any start-up. Taking the initiative and finding resourceful solutions to problems that may seem intractable is a sure way to get ahead.
- Flexibility – in any start-up, the one thing you can rely on is constant change. To cope with this, you need to be flexible and willing to move on quickly.
- Enthusiasm – you must embrace what you do and your business aims; in other words, be a true believer in the mission.
- Patience and perseverance – don’t give up when things don’t turn out as planned. More often than not, they don’t.
The future of platforms
Apple, Microsoft, Alphabet, Amazon. Facebook, Alibaba, and Tencent are all leading platform businesses with a combined market value of $6.3 trillion. There is no doubt that platforms are here to stay. As we have indicated, many platforms fail. Successful platforms must finely judge the future trends that will lead to success.
Over the next decade or so, we will see platforms disrupt many more traditional businesses. AI and machine learning are likely to play an increasing role, and perhaps quantum computing will eventually prove useful. Driverless cars and ride-sharing platforms are now on the horizon. In general, ownership is likely to give way to sharing, organised through peer to peer transaction platforms.