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December 23, 2016 - June 6, 2017
one of the most important economic and social developments of our time—the rise of the platform as a business and organizational model.
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.
The traditional system employed by most businesses is one we describe as a pipeline.
linear value chain.
In recent years, more and more businesses are shifting from the pipeline structure to the platform structure. In this shift, the simple pipeline arrangement is transformed into a complex relationship in which producers, consumers, and the platform itself enter into a variable set of relationships.
In the process, they exchange, consume, and sometimes cocreate something of value.
Platforms beat pipelines because platforms scale more efficiently by eliminating gatekeepers.
One reason is that pipelines rely on inefficient gatekeepers to manage the flow of value from the producer to the consumer. In the traditional publishing industry, editors select a few books and authors from among the thousands offered to them and hope the ones they choose will prove to be popular.
The platform system can grow to scale more rapidly and efficiently because the traditional gatekeepers—editors—are replaced by market signals provided automatically by the entire community of readers.
The traditional model of higher education forces students and their parents to purchase one-size-fits-all bundles that include administration, teaching, facilities, research, and much more. In their role as gatekeepers, universities can require families to buy the entire package because it is the only way they can get the valuable certification that a degree offers.
Platforms beat pipelines because platforms unlock new sources of value creation and supply.
Airbnb applies the platform model to the hotel business: Airbnb doesn’t own any rooms. Instead, it created and maintains the platform that allows individual participants to provide the rooms directly to consumers.
One implication is that growth can be much faster for Airbnb or any rival platform than for a traditional hotel company since growth is no longer constrained by the ability to deploy capital and manage physical assets.
Whereas the leanest traditional businesses ran on just-in-time inventory, new organizational platforms run on not-even-mine inventory.
platforms disrupt the traditional competitive landscape by exposing new supply to the market.
The sharing economy is built on the idea that many items, such as automobiles, boats, and even lawnmowers, sit idle most of the time.
Platforms beat pipelines by using data-based tools to create community feedback loops.
By contrast, traditional pipeline firms rely on mechanisms of control—editors, managers, supervisors—to ensure quality and shape market interactions. These control mechanisms are costly and inefficient to grow to scale.
Reference works like the venerable Encyclopaedia Britannica were once created through costly, complex, difficult-to-manage centralized supply chains of academic experts, writers, and editors.
Because the bulk of a platform’s value is created by its community of users, the platform business must shift its focus from internal activities to external activities.
reflect the fact that marketing messages once disseminated by company employees and agents now spread via consumers themselves—a reflection of the inverted nature of communication in a world dominated by platforms.
“Uber, the world’s largest taxi company, owns no vehicles. Facebook, the world’s most popular media owner, creates no content. Alibaba, the most valuable retailer, has no inventory. And Airbnb, the world’s largest accommodation provider, owns no real estate.”
Strategy has moved from controlling unique internal resources and erecting competitive barriers to orchestrating external resources and engaging vibrant communities.
they all exist to create matches and facilitate interactions among producers and consumers, whatever the goods being exchanged may be.
Sacks’s napkin sketch captures a classic example of network effects. It shows how the value of Uber to each of its participants grows the more people use it—which attracts still more users, thereby increasing the value of the service even more.
positive network effects are the main source of value creation and competitive advantage in a platform business.
In the twentieth-century industrial era, giant monopolies were created based on supply economies of scale. These are driven by production efficiencies, which reduce the unit cost of creating a product or service as the quantities produced increase.
demand economies of scale take advantage of technological improvements on the demand side—the other half of the profit equation from the production side. Demand economies of scale are driven by efficiencies in social networks, demand aggregation, app development, and other phenomena that make bigger networks more valuable to their users.
An MIT professor we know likes to joke that the prize for “greatest salesperson in history” should go to whoever sold the first telephone. Arguably, it had zero value,
This is known as nonlinear or convex growth, and it is precisely the characteristic growth pattern seen in companies like Microsoft in the 1990s, Apple and Facebook today, and Uber tomorrow. (Working in reverse, it explains the convex collapse of Blackberry in the 2000s: as users began to flee the Blackberry platform, the loss of network nodes caused the value of the network itself to plummet, encouraging still more people to abandon Blackberry for other devices.)
Growth via network effects leads to market expansion. New buyers enter the market, attracted by the growing number of friends who are part of the network. If prices also fall—as they often do when technology matures and production quantities increase—then network effects work together with more attractive pricing to drive massive market adoption.
in the case of Uber, two sides of the market are involved: riders attract drivers, and drivers attract riders. A similar dynamic can be seen in many other platform businesses. In the case of Google’s Android, app developers attract consumers, and consumers attract app developers.
if they can get one side to join the platform, the other side will follow.
in a two-sided market, it can sometimes make economic sense to accept financial losses—not just temporarily, but permanently!—in Market A if growing that market enables growth in a related Market B.
Attracting customers through extraordinarily low pricing—as low as zero in some cases—is a foolproof way of buying market share, at least temporarily.
Typically, only 1–2 percent of customers convert from free to paying.
Virality is about attracting people who are off the platform and enticing them to join it, while network effects are about increasing value among people on-platform.
effective platforms are able to expand in size quickly and easily, thereby scaling the value that derives from network effects.
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.
Scaling a network requires that both sides of the market grow proportionally.
In some cases, the growth of a platform can be facilitated by an effect we call side switching.
Blablacar
frictionless entry must be balanced through effective curation.
They are valuable because of the communities that participate in their platforms.
where network effects are present, the focus of organizational attention must shift from inside to outside. The firm inverts; it turns inside out.
In the world of network effects, ecosystems of users are the new source of competitive advantage and market dominance.
the producer and the consumer exchange three things: information, goods or services, and some form of currency.
in every case, the exchange of information takes place through the platform itself.
there are other forms of value, and therefore other ways in which consumers “pay” producers in the world of platforms.
attention, fame, influence, reputation, and other intangible forms of value can play the role of “currency” on a platform.
The platform provides an infrastructure that participants plug in to, which provides tools and rules to make exchanges easy and mutually rewarding.
