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

A platform is a business based on enabling value-creating interactions between external producers and consumers.

“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.”

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. They can give the largest company in a platform market a network effect advantage that is extremely difficult for competitors to overcome.

On average, they enjoy a market multiplier (based on the relationship between a firm’s market valuation and its price-to-earnings ratio) of 8.2, as compared with 4.8 for technology creators, 2.6 for service providers, and 2.0 for asset builders.16

One reason is that it is far easier to scale network effects outside a firm than inside it—since there are always many more people outside a firm than inside it.

The management of human resources shifts from employees to crowds.

Innovation shifts from in-house R & D to open innovation.

The primary venue for activities in which value is created for participants shifts from an internal production department to a collection of external producers and consumers—which means that manage...

Growth comes not from horizontal integration and vertical integration but from functional integration and network orchestration. The focus on processes such as finance and accounting shifts from cash flows and assets you can own to communities and assets you can influence. And while platform businesses themselves are often extraordinarily profita...

In the world of network effects, ecosystems of users are the new source of competitive advantage and market dominance.

In every such exchange, the producer and the consumer exchange three things: information, goods or services, and some form of currency.

Thus, every platform business must be designed to facilitate the exchange of information.

The platform’s goal, then, is to bring together producers and consumers and enable them to engage in these three forms of exchange: of information, of goods or services, and of currency. The platform provides an infrastructure that participants plug in to, which provides tools and rules to make exchanges easy and mutually rewarding.

EIGHT STRATEGIES FOR BEATING THE CHICKEN-OR-EGG DILEMMA

For listing companies

OpenTable solved the problem by first distributing booking management

well-designed platforms create natural incentives for users to share.

Successful platforms use one of eight proven strategies for solving the chicken-or-egg problem: the follow-the-rabbit strategy; the piggyback strategy; the seeding strategy; the marquee strategy; the single-side strategy; the producer evangelism strategy; the big bang adoption strategy; and the micromarket strategy. The speed of a platform’s expansion can be accelerated through viral growth. This depends on four key elements: the sender, the value unit, the external network, and the recipient.

Monetization, in fact, is one of the most difficult—and fascinating—issues that any platform company must address.

Charging for access may lead people to avoid the platform altogether; charging for usage may inhibit frequent participation; charging for production reduces value creation, making the platform less attractive to consumers; and charging for consumption reduces consumption, making the platform less attractive to producers.

partially free pricing can power growth. As every business student learns, the model behind the safety razor business that entrepreneur King Gillette founded in 1901 involved distributing the razors for free—or at a very low, subsidized cost—while charging for the blades.

Another version of this strategy is the freemium model, in which a free layer of service attracts users who eventually pay for an enhanced version. Many online service platforms, including Dropbox and MailChimp, work this way. Both the razors-and-blades model and the freemium model monetize the same user base, or portions thereof.

Platforms may also offer free or subsidized pricing to one user base while charging full price to an entirely different user base.

Nobel Prize awarded to one of the other originators of two-sided market economics,

charging for the value that the platform technology creates for those users. This value falls into four broad categories:

lesson? Network effects as measured by numbers of visitors alone don’t necessarily reflect the monetary value of a platform. The interactions facilitated must generate a significant amount of excess value that can be captured by the platform without producing a negative impact on network effects. When that’s not the case, monetization may not be possible.

As we’ve discussed, a platform’s goal is not simply to pump up the numbers of participants and interactions. It must also take steps to encourage desirable interactions and discourage undesirable ones.

“You never take first money.” In other words, only after a value unit has been created and exchanged with results that are satisfactory to both the producer and the consumer should the platform business itself seek to capture a share of that value.

These key principles of platform design help ensure that the transition to monetization—from free to fee,

platform is “open” to the extent that (1) no restrictions are placed on participation in its development, commercialization, or use; or (2) any restrictions—for example, requirements to conform with technical standards or pay licensing fees—are reasonable and non-discriminatory, that is, they are applied uniformly to all potential platform participants.2

‘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 market dominance of Myspace over Facebook during 2006 and early 2007. © 2015, Alexa Internet (www.alexa.com).

When the manager and the sponsor are separate, the manager is closest to the customer/producer relationship as well as to outside developers who may contribute to the platform. This gives the manager considerable influence over the daily operations of the platform. But, in general, the sponsor has greater legal and economic control over the platform and therefore a larger measure of power over its long-term strategy.