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May 12 - September 1, 2019
Harvard Business Review article “Strategies for Two-Sided Markets,” coauthored with Harvard professor Thomas R. Eisenmann, laid out what became one of the most widely taught theories of Internet business, one that is still taught in MBA programs around the world.
practically any industry in which information is an important ingredient is a candidate for the platform revolution.
A platform is a business based on enabling value-creating interactions between external producers and consumers. The platform provides an open, participative infrastructure for these interactions and sets governance conditions for them. The platform’s overarching purpose: to consummate matches among users and facilitate the exchange of goods, services, or social currency, thereby enabling value creation for all participants.
platforms disrupt the traditional competitive landscape by exposing new supply to the market.
they all exist to create matches and facilitate interactions among producers and consumers, whatever the goods being exchanged may be.
positive network effects are the main source of value creation and competitive advantage in a platform business.
Frictionless entry is the ability of users to quickly and easily join a platform and begin participating in the value creation that the platform facilitates. Frictionless entry is a key factor in enabling a platform to grow rapidly.
The end-to-end concept can also be applied to the design of a platform. In this case, the principle states that application-specific features should reside in the layer of process at the edge or on top of the platform, rather than at the roots deep within the platform. Only the highest-volume, highest-value features that cut across apps should become part of the core platform.
Can any product or service become the basis of a platform business? Here’s the test: if the firm can use either information or community to add value to what it sells, then there is potential for creating a viable platform. This creates huge opportunities for a lot of firms.
for a platform business, user commitment and active usage, not sign-ups or acquisitions, are the true indicators of customer adoption. That’s why platforms must attract users by structuring incentives for participation—preferably incentives that are organically connected to the interactions made possible by the platform. Traditionally, the marketing function was divorced from the product. In network businesses, marketing needs to be baked into the platform.
As we’ve observed throughout this chapter, a monetization model is sustainable only when it strengthens network effects (rather than weakening them). Charging third-party producers for community access is effective if and only if the newly added contents—such as the job listings on Dribbble—enhance the value of the platform to its users.
TAKEAWAYS FROM CHAPTER SIX A well-managed platform can create excess value in four ways: access to value creation, access to the market, access to tools, and curation. Monetization is about capturing a portion of the excess value created.
Chris DeWolfe, cofounder of Myspace, recalled the company’s flawed thinking in a 2011 interview: “We tried to create every feature in the world and said, ‘O.K., we can do it, why should we [open up to] let a third party do it?’ We should have picked 5 to 10 key features that we totally focused on and let other people innovate on everything else.”
The power of APIs to attract extension developers and the value they can create is enormous. Compare the financial results experienced by two major retailers: traditional giant Walmart and online platform Amazon. Amazon has some thirty-three open APIs as well as over 300 API “mashups” (i.e., combination tools that span two or more APIs), enabling e-commerce, cloud computing, messaging, search engine optimization, and payments. By contrast, Walmart has just one API, an e-commerce tool.14 Partly as a result of this difference, Amazon’s stock market capitalization exceeded that of Walmart for the
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three fundamental rules of good governance: • Always create value for the consumers you serve; • Don’t use your power to change the rules in your favor; and • Don’t take more than a fair share of the wealth.
Like it or not, firms like these already serve as the unofficial and unelected regulators of millions of lives. For this reason, platforms have much to learn from cities and states, which have had thousands of years to evolve principles of good governance. Like the platform businesses of today, cities and states have long had to wrestle with the question of how best to create wealth and distribute it fairly. Increasing evidence suggests that just governance is a crucially important factor in the ability of a state to create wealth—even more important than such obviously valuable assets as
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The underlying principle: Give fast, open feedback when applying laws that define good behavior, but give slow, opaque feedback when applying laws that punish bad behavior.
Rather than seeking to minimize their own risk, platforms should use market mechanisms such as risk pooling and insurance to reduce risk for their participants and thereby maximize overall value creation. Good governance means looking after the health of one’s ecosystem partners.
Hence the seven rules presented in the Yegge Rant: 1. All teams will henceforth expose their data and functionality through service interfaces. 2. Teams must communicate with each other through these interfaces. 3. There will be no other form of interprocess communication allowed: no direct linking, no direct reads of another team’s data store, no shared-memory model, no back-doors whatsoever. The only communication allowed is via service interface calls over the network. 4. It doesn’t matter what technology they use. HTTP, Corba, Pubsub, custom protocols—doesn’t matter. Bezos doesn’t
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Just and fair governance can create wealth. We saw this principal operate in the story of Singapore’s rise; we see it here in the story of IAL and the launch of the USB standard.
SELF-GOVERNANCE RULES FOLLOWED BY INTEL ARCHITECTURE LABS IN LAUNCHING THE USB STANDARD 1. Give customers a voice in key decisions. Use a separate business unit, with a “Chinese wall,” to handle conflicting agendas. 2. For trusting relationships, open standards must remain open. 3. Treat IP [intellectual property] fairly, yours and theirs. 4. Communicate a clear road map and stick to it. Commitments to act or not act must be credible. 5. Reserve the right to enter strategically important markets with notice. Don’t surprise people and don’t play favorites with news. 6. In case of
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Governance should not be static. When signs of change appear on the horizon—such as new behaviors by platform users, unanticipated conflicts among them, or encroachments by new competitors—information about the change should spread rapidly through the organization, encouraging creative conversations about how the governance system may need to evolve in response.
user commitment and active usage of the platform are the vital metrics of platform adoption, not sign-ups.
These three crucial categories of metrics—liquidity, matching quality, and trust—combine to provide the managers of startup platforms with an accurate picture of the platform’s rate of interaction success and the key factors that contribute to it.
As a business leader you need to figure out the metric that matters most for your company and understand that the more you measure, the less prioritized you’ll be. Don’t fall into the trap of trying to measure everything. What I’ve learned is that in the early days, what matters most is having customers who love and use your product. Figure out the one or two best measures to determine this.
“you should make sure your metrics meet the ‘3 A’s test’ where your metrics are actionable, accessible, and auditable.” They must be actionable in that they provide clear guidance for strategic and managerial decisions, and in being clearly related to the success of the business. They must be accessible in that they are comprehensible to the people who gather and use the information. And they must be auditable in the sense that they are real and meaningful—based on clean, accurate data, precisely defined, and reflecting the reality of the business as perceived by users.
Industries that are most prone to platform transformation in the near future include those that are information-intensive, those with unscalable gatekeepers, those that are highly fragmented, and those characterized by extreme information asymmetries.
