Platform Revolution: How Networked Markets Are Transforming the Economy and How to Make Them Work for You: How Networked Markets Are Transforming the Economy―and How to Make Them Work for You

by Geoffrey G. Parker

Once the platform has reached critical mass and users are gaining significant value from the platform, the focus of metrics can shift to customer retention and the conversion of active users to paying customers. This is the phase in which monetization becomes a crucial issue.

It’s crucial to measure and track the degree to which both producers and consumers are repeatedly participating in the platform and increasing their participation over time.

At startup companies—whether they operate as pipelines or as platforms—resources are usually stretched. With money, time, and talent at a premium, people find themselves doing multiple jobs, often in domains far from their expertise.

So what kinds of metrics are most valuable during the startup phase of a platform business? Platform managers should focus on the core interaction and the benefits it creates for both producers and consumers on the platform. To define success or failure for a platform, and to identify how to improve it, there are three main metrics: liquidity, matching quality, and trust.

Note that user commitment and active usage of the platform are the vital metrics of platform adoption, not sign-ups. That’s why our definition of liquidity includes both user totals and the level of interactions occurring.

Platforms that focus on content creation require different metrics. For example, some measure co-creation

once the platform reaches a critical mass of users, new issues arise. Managers must still ensure that the core interaction is creating value and that the inflow of engaged users exceeds the outflow so that the platform is still growing.

Combining all these forms of data, the value of a producer can be calculated using traditional lifetime value (LTV) models used in many kinds of businesses. These models capture the mechanism by which repeat producers provide recurring platform revenues without incurring additional acquisition costs—that is, expenses incurred by the platform in attracting and engaging these producers.

Lean startup guru Eric Ries echoes the need to be selective in the design and use of metrics. In particular, he cautions against what he calls “vanity metrics,” such as total sign-ups—a relatively meaningless statistic that often increases even as the volume of interactions is flat or actually declining. Vanity metrics fail to indicate accurately whether the business is really achieving critical mass or the liquidity it needs.

What has changed is not simply the types of competitors but the very nature of the competitive battle. The result is a series of seismic upheavals that are making one business landscape after another almost unrecognizable. We’re not speaking only of the dramatic disruptions produced by the advent of platform businesses in traditional marketplaces (as described in chapter 4 and elsewhere in this book). We’re also referring to the dramatic competitive battles being waged within the world of platforms, between platform companies—with results that are often startling, even shocking.2

“China’s Web entrepreneurs are positioning themselves to compete in—and win—the race to build the first truly global online marketplace.”

to fully understand how the rise of the platform is transforming the nature of competition, we need to reexamine the traditional concepts of competition that have dominated business thinking for decades—and that many businesspeople still take for granted.

in an age of “hypercompetition” (D’Aveni’s term), sustainable advantage is illusory. Technological advances drive shorter and shorter cycle times on everything from “microchips to corn chips, software to soft drinks, and packaged goods to package delivery services.”10 Connecting across the Internet also allows firms to redraw industrial and geographic boundaries so that stable, slow-moving oligopolies fall to nimbler competitors attacking with new tools and technologies.

First, firms that understand how platforms work can now intentionally manipulate network effects to remake markets, not just respond to them. The implicit assumption in traditional business strategy that competition is a zero-sum game is far less applicable in the world of platforms. Rather than re-dividing a pie of more-or-less static size, platform businesses often grow the pie (as, for example, Amazon has done by innovating new models, such as self-publishing and publishing on demand, within the traditional book industry) or create an alternative pie that taps new markets and sources of supply (as Airbnb and Uber have done alongside the traditional hotel and taxi industries).

Second, platforms turn businesses inside out, moving managerial influence from inside to outside the firm’s boundaries. Thus, a firm no longer needs to seize every new opportunity on its own; instead, it can pursue only the

best opportunities while helping ecosystem partners seize the others, with all partners sharing the value they jointly create.13

The five forces model depends on the distinct boundaries that characterize traditional product markets. Each of the five forces—customer power, supplier power, and so on—is a separate entity that must be managed independently. By contrast, in platform markets, a winning strategy blurs the boundaries among market participants, thereby increasing valuable interactions on the platform.

Multihoming occurs when users engage in similar types of interactions on more than one platform. A freelance professional who presents his credentials on two or more service marketing platforms, a music fan who downloads, stores, and shares tunes on more than one music site, and a driver who solicits rides through both Uber and Lyft all illustrate the phenomenon of multihoming. Platform businesses seek to discourage multihoming, since it facilitates switching—when a user abandons one platform in favor of another. Limiting multihoming is a cardinal competitive tactic for platforms.

Platform managers need to adjust this strategy. For them, the key question is whether the target company creates value for a user base that significantly overlaps with the one they are currently serving.

Platforms certainly create benefits for their users—if they didn’t, they wouldn’t be exploding in popularity. But they also create unintended side effects, including negative externalities, that society as a whole must consider and address.

Relatively few people want to live in a world free of all regulation, and in a complex society like the one we live in today, regulation serves a number of important social functions.

Today, there’s a trend toward regulation that was once provided by governments now being provided by private entities acting in their own self-interest—for example, the gradual shift from nationally mandated accounting standards like the Generally Accepted Accounting Principles used in the United States toward the International Financial Reporting Standards promulgated by the International Accounting Standards Board, a private organization based in London.

In 2015, the mobile operating system Android has split into open and proprietary versions.

The first, provided by economists Heli Koski and Tobias Kretschmer, suggests that industries with strong network effects can generate market inefficiencies and that the goal of public policy should be to minimize those. The market inefficiencies of particular concern are abuse of dominant position and the failure to ensure that new and better technologies are adopted as soon as they become available.

Industries with high failure costs. The costs of a defaulted loan or matching a patient with the wrong doctor are much higher than the cost of showing inappropriate content on a media platform. Consumers are reluctant to participate on platforms when the perceived costs of failure are high.

For example, the Minerva Project,

launched in September 2014, with an initial class of thirty-three students, aims to replace the traditional liberal arts college with an online platform that allows students to attend interactive seminars with professors located anywhere in the world. The students themselves will live for a year at a time in dorms in various cities—San Francisco, Berlin, Buenos Aires—where local cultural, professional, and recreation facilities will be incorporated into the curriculum. Minerva hopes to grow to admit some 2,500 students per year, each paying a total fee of around $28,000 (including room and board)—about half the cost of attending a selective college or university.

Under the circumstances, it’s not surprising that, according to consultant Kuraitis, Apple has been hiring a large number of professionals to staff up its health platform business—including many with MD and PhD degrees.

It seems clear that, within the next decade or two, at least one giant platform business will become a major player in the U.S. health industry. Apple is one of the companies with its eyes fixed on that goal.

The purpose of all these human constructs should be the unlocking of individual potential and the building of a society in which everyone has the opportunity to live a rich, fulfilling, creative, and abundant life. It’s up to all of us—business leaders, professionals, working people, policy-makers, educators, and ordinary citizens—to play our part in making sure that the platform revolution brings us closer to that objective.