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

Modularity is a strategy for organizing complex products and processes efficiently. A modular system is composed of units (or modules) that are designed independently but still function as an integrated whole. Designers achieve modularity by partitioning information into visible design rules and hidden design parameters. Modularity is beneficial only if the partition is precise, unambiguous, and complete. The visible design rules (also called visible information) are decisions that affect subsequent design decisions. Ideally, the visible design rules are established early in a design process and communicated broadly to those involved.

We argue that the fundamental architecture behind all platforms is essentially the same: namely, the system is partitioned into a set of “core” components with low variety and a complementary set of “peripheral” components with high variety. The low-variety components constitute the platform. They are the long-lived elements of the system and thus implicitly or explicitly establish the system’s interfaces, [and] the rules governing interactions among the different parts.15

Remember that one of the key characteristics that distinguishes a platform from a traditional business is that most of the activity is controlled by users, not by the owners or managers of the platform.

Chris Messina, an engineer at Google, originally suggested the use of hashtags to annotate and discover similar tweets. Today, the hashtag has become a mainstay of Twitter.

Platform designers should always leave room for serendipitous discoveries, as users often lead the way to where the design should evolve. Close monitoring of user behavior on the platform is almost certain to reveal unexpected patterns—some of which may suggest fruitful new areas for value creation. The best platforms allow room for user quirks, and they are open enough to gradually incorporate such quirks into the design of the platform.

platform must perform three crucial functions: pull, facilitate, and match. All three are essential, and each has its special challenges.

platform grows, it often finds ways to expand beyond the core interaction. New kinds of interactions may be layered on top of the core interaction, often attracting new participants in the process.

which enormously expands a platform’s reach, speed, convenience, and efficiency.

breathtaking

And if all that is not enough, consider this observation by Kalanick: “If we can get you a car in five minutes, we can get you anything in five minutes.”5 Anything at all? One wonders what limits can be set on Uber’s disruptive potential. Kalanick seems not to acknowledge any.

In particular, the rise of the world of platforms is reconfiguring the familiar business processes of value creation, value consumption, and quality control.

enabling new forms of consumer behavior.

This is because, in their early stages, they fail to offer the quality and reliability provided by their traditional competitors.

This concept of de-linking assets from value helped rescue Australian farmers from a drought more severe than that faced by California in 2015. Like California, Australia suffered from a patchwork system of water rights that limits the use of water to whatever an individual owner has in mind. The system was reformed beginning in 2003 by separating land ownership from water rights. With the help of a private company called Waterfind, Australia created a platform for water trading that greatly increased the economic efficiency of water use.

Thus, while platforms displace large and inefficient intermediaries, they empower small and nimble service providers who leverage the platform to provide services to end users.

haphazard

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.

cheerleaders

the media decided that the key to long-term success was growth at all costs—and many of them burned through millions of dollars in pursuit of that growth.

avowed

Nonetheless, Confinity attracted few users. After two years, having gained only 10,000 signups, Levchin and Thiel shut Confinity down.

start with, PayPal reduced the friction involved in accepting online payments.

All a user needed was an email address and a credit card.

PayPal’s user-friendly, almost frictionless system attracted a significant initial base of consumers

PayPal’s big challenge was to get new customers. They tried advertising. It was too expensive. They tried BD [business development] deals with big banks. Bureaucratic hilarity ensued. … the PayPal team reached an important conclusion: BD didn’t work. They needed organic, viral growth. They needed to give people money.

New customers got $10 for signing up, and existing ones got $10 for referrals.

commitment was more important than user acquisition.

Not only did the incentive payments make joining PayPal feel riskless and attractive, they also virtually guaranteed that new users would start participating in transactions—if only to spend the $10 they’d been gifted in their accounts.

Despite these efforts, Billpoint failed to get traction among eBay users, partly because of its belated launch, partly because of ill-advised business moves by eBay—for example, the decision to squelch deals that would have promoted Billpoint’s use by non-eBay merchants.

user commitment and active usage, not sign-ups or acquisitions, are the true indicators of customer

This new way of thinking about marketing is reflected in the strategies that the leaders of PayPal used to make their platform successful. Rather than pushing PayPal into the consciousness of users through, for example, television commercials, print advertisements, or email blasts, they created incentives that gave the platform itself a pull appeal—including both the ultra-simplicity of PayPal’s service and the payments that rewarded those who delivered new sign-ups.

creating demand for PayPal’s service among buyers and simulating demand through the eBay shopping bot.

YouTube’s unrelenting focus on producers helped in four ways. First, it seeded the platform with content. Second, it created a curation dynamic on the platform to identify quality content by letting viewers vote up or down on the videos they watched. Third, it leveraged producers to bring in consumers.

focused exclusively on consumers (viewers) by seeding the platform with content internally, specifically creating content in categories that were increasingly being policed on YouTube, including pirated videos and pornography.

Use a non-platform demonstration project to model success, thereby attracting both users and producers to a new platform erected on your project’s proven infrastructure.

Intel partnered with the Japanese telecom company NTT to demonstrate that a market existed.

designed to provide tools, products, services, or other benefits that will attract one set of users—either consumers or producers.

To start, the platform creates conditions such that value units can be created that are relevant to users even when the overall size of the network is small. It then strives to stimulate a burst of activity that will simultaneously attract consumers and producers in sufficient numbers to create larger numbers of value units and value-producing interactions, so that network effects can begin to kick in. Later in this chapter, we’ll show how Facebook employed this strategy to make its fledgling social network attractive to users even when the universe of potential members was very small—limited, in fact, to students at a single university.

This is a classic strategy used in many successful platform launches. As we’ve seen, PayPal used this strategy when it piggybacked on eBay’s online auction platform.

It seeded the initial database by borrowing listings from existing yellow pages as well as by employing feet-on-street soldiers who went door to door collecting business information.

It then posts this information on its platform, giving consumers the impression that these merchants are actually participating on the platform.

Reddit is a highly popular link-sharing community that circulates vast amounts of Internet content. When it first launched, the site was seeded with fake profiles posting links to the kind of content the founders wanted to see on the site over time. It worked.

bigoted

platform company may choose to purchase a marquee participant in order to obtain exclusive access to the seeds it produces. For a number of years, software producer Bungie specialized in games, like the popular Marathon, for use on Apple computers. In 2000, with the Xbox nearing launch, Microsoft bought out Bungie and repurposed a game then in development under the title Halo: Combat Evolved as an Xbox exclusive.

poses

OpenTable solved the problem by first distributing booking management software that restaurants could use to manage their seating inventory. Once OpenTable had enough restaurants on board, they built out the consumer side, which allowed them to start booking tables and collecting

It shrewdly offers producers this invitation: “Bring us your customers, and you will have the last word in any bidding competition … but only for the customers you bring.” Thus, suppliers are incentivized to invite their customers to join Mercateo, and to do so promptly, before a competing company can claim them and enjoy the advantage of final-offer bidding.

As we’ve noted, in today’s crowded, networked, and ultra-competitive arena, push strategies have become increasingly ineffective at enabling companies to achieve rapid, large-scale growth.

Start by targeting a tiny market that comprises members who are already engaging in interactions. This enables the platform to provide the effective matchmaking characteristic of a large market even in the earliest stages of growth.

One of the most powerful ways to accelerate the growth of a platform is by achieving viral growth.