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

practically any industry in which information is an important ingredient is a candidate for the platform revolution. That includes businesses whose “product” is information (like education and media) but also any business where access to information about customer needs, price fluctuations, supply and demand, and market trends has value—which includes almost every business.

Let’s start with a basic definition. 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.

This summarizes one of the fundamental differences between 3DW and other TRMB Bldgs content products/businesses.

in this way, the workings of platforms may seem simple enough. Yet today’s platforms, empowered by digital technology that annihilates barriers of time and space, and employing smart, sophisticated software tools that connect producers

and consumers more precisely, speedily, and easily than ever before, are producing results that ar...

a pipeline is a business that employs a step-by-step arrangement for creating and transferring value, with producers at one end and consumers at the other. A firm first designs a product or service. Then the product is manufactured and offered for sale, or a system is put in place to deliver the service. Finally, a customer shows up and purchases the product or service. Because of its simple, single-track shape, we may also describe a pipeline business as a linear value chain.

In platform markets, the nature of supply changes. Supply now unlocks spare capacity and harnesses contributions from the community which used to be only a source of demand. Whereas the leanest traditional businesses ran on just-in-time inventory, new organizational platforms run on not-even-mine inventory.

As these platforms gather community signals about the quality of content (in the case of YouTube) or the reputation of service providers (on Airbnb), subsequent market interactions become increasingly efficient. Feedback from other consumers makes it easy to find videos or rental properties that are likely to suit your needs.

Platforms invert the firm. 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.

Rob Cain, the CIO of Coca-Cola, notes that the key terms used to define systems of message delivery have shifted from broadcast to segmentation, and then to virality and social influence; from push to pull; and from outbound to inbound. All these terminological changes 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.

Similarly, information technology systems have evolved from back-office enterprise resource planning (ERP) systems to front-office consumer relationship management (CRM) systems and, most recently, to out-of-the-office experiments using social media and big data—another shift from inward focus to outward focus. Finance is shifting its focus from shareholder value and discounted cash flows of assets owned by the firm to stakeholder value and the role of interactions that take place outside the firm.

Operations management has likewise shifted from optimizing the firm’s inventory and supply chain systems to managing external assets the firm doesn’t directly control. Tom Goodwin, senior vice president of strategy for Havas Media, describes this change succinctly: “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.”3 The community provides these resources.

Strategy has moved from controlling unique internal resources and erecting competitive barriers to orchestrating external resources and engaging vibrant communities. And innovation is no longer the province of in-house experts and research and development labs, but is produced through crowdsourc...

platform firms emphasize ecosystem governance more than product optimization, and persuasion of outside partners more than control of internal employees.

In classic platform style, Uber performs a matching service. It helps riders find drivers, and vice versa. As drivers sign on and coverage density rises within a city, a number of striking growth dynamics are set in motion. Riders tell their friends about the service; some even start driving themselves in their spare time. Wait time falls for riders, and downtime falls for drivers. Less downtime means that a driver can make the same amount of money even if fares are lower, because he has more riders during the same number of working hours. Thus, less downtime means that Uber can cut fares and stimulate even more demand, which creates a virtuous cycle that increases coverage density still further.

Network effects refers to the impact that the number of users of a platform has on the value created for each user. Positive network effects refers to the ability of a large, well-managed platform community to produce significant value for each user of the platform.

In the twenty-first-century Internet era, comparable monopolies are being created by demand economies of scale (a term used by the two experts largely responsible for popularizing the concept of network effects, Hal Varian, the chief economist at Google, and business professor Carl Shapiro).

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.

Demand economies of scale are the fundamental source of positive network effects, and thus the chief drivers of economic value in today’s world. This is not to say that supply economies of scale no longer matter; of course they do. But demand economies of scale, in the form of network effects, have become the most important differentiating factor.

the value of a telephone network grows nonlinearly as the number of subscribers to the network increases, making more connections among subscribers possible.

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.)

The importance of these effects for stimulating network growth is so great that platform businesses will often spend money to attract participants to one side of the market. They know that, if they can get one side to join the platform, the other side will follow.

Two-sided network effects with positive feedback explain how Uber can afford to use millions of dollars of money from Bill Gurley and other investors to give away free rides worth $30 each. Uber’s coupons buy market share in a way that attracts a virtuous cycle of drivers and riders who will later pay full price to participate in the network.

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. The only proviso is that the profits to be earned in Market B must outweigh the losses incurred in Market A.

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.

worked—driving traffic from one user group in order to drive profits from another user group. We described our findings in a paper that analyzed the mathematics of two-sided network effects.10 Today, such successful platform businesses as eBay, Uber, Airbnb, Upwork, PayPal, and Google exhibit this model extensively.

Scaling a network requires that both sides of the market grow proportionally. For example, one Uber driver can serve an average of about three Uber riders an hour. It would make no sense for Uber to have one rider and 1,000 drivers—nor 1,000 riders and one driver. Airbnb faces a parallel issue in scaling both hosts and guests. If one side becomes disproportionally large, coupons or discounting to attract more participants to the other side becomes good business.

produce goods and services for others to consume. On some platforms, users engage in side switching easily and repeatedly.

A scalable business model, frictionless entry, and side switching all serve to lubricate network effects.

One negative network effect occurs when the growth in numbers that enables more matches between producers and consumers also leads to increasing difficulty, or impossibility, in finding the best match.

3DW search quality

effective curation.

This is the process by which a platform filters, controls, and limits the access of users to the platform, the activities they participate in, and the connections they form with other users. When the quality of a platform is effectively curated, users find it easy to make matches that produce significant value for them; when curation is nonexistent or poorly handled, us...

As any statistician will tell you, having more data to work with generally increases the accuracy and value of the inferences you can draw from the data. Thus, the larger your network grows, the better your curation can become—a phenomenon we refer to as data-driven network effects.

Every successful platform faces the problem of matching content and connections at scale—which means that, at some point in its growth, every successful platform must address the challenge of effective curation. We’ll return to the issue of curation in later chapters.

The more people who are creating and sharing images using the PDF platform, the greater the benefit you get from using the same platform for your own image production needs.

In a similar way, when the number of app developers for Windows grows, the versatility and power of the operating system increases for users; and when the number of Windows users grows, so do the potential benefits (financial and otherwise) for app developers. Positive cross-side effects produce win-win results.

Of course, cross-side effects are not necessarily symmetrical. On OkCupid, women attract men more than men attract women. On Uber, a single driver is more critical to growth than a single rider. On Android, a single developer’s app attracts users more than a single user attracts developer apps. On Twitter, the vast majority of people read, while a minority tweet. On question-and-answer networks like Quora, the vast majority asks questions, while a minority answers them.

when the proliferation of messages from competing merchants on a platform site leads to unpleasant advertising clutter, the positive impact of expanding producer choice may be transformed into a negative cross-side effect that turns off consumers and damages the platform’s value.

Good platform husbandry seeks to reinforce positive network effects, creating and strengthening as many positive feedback loops as possible.

most Internet era giants rely on demand-side economies of scale. Firms such as Airbnb, Uber, Dropbox, Threadless, Upwork, Google, and Facebook are not valuable because of their cost structures: the capital they employ, the machinery they run, or the human resources they command. They are valuable because of the communities that participate in their platforms. The reason Instagram sold for $1 billion is not its thirteen employees; the reason WhatsApp sold for $19 billion wasn’t its fifty employees. The reasons were the same: the network effects both organizations had created. Standard accounting practices might not factor the value of communities into the value of a firm, but stock markets do. Little by little, the accountants are catching up. A team of experts collaborating with the consulting and accounting firm of Deloitte published research that sorts companies into four broad categories based on their chief economic activity: asset builders, service providers, technology creators, and network orchestrators. Asset builders develop physical assets that they use to deliver physical goods; companies like Ford and Walmart are examples. Service providers employ workers who provide services to customers; companies like UnitedHealthcare and Accenture are examples. Technology creators develop and sell forms of intellectual property, such as software and biotechnology; Microsoft and Amgen are examples. And network orchestrators develop networks in which people and companies crea...

Furthermore, where network effects are present, industries operate by different rules.17 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. Thus, where network effects are present, the focus of organizational attention must shift from inside to outside. The firm inverts; it turns inside out. The management of human resources shifts from employees to crowds.18 Innovation shifts from in-house R & D to open innovation.19 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 management of externalities becomes a key leadership skill. 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 profitable, the chief locus of wealth creation is now outside rather than inside the organization.

todays content horizontal

Furthermore, where network effects are present, industries operate by different rules.17 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. Thus, where network effects are present, the focus of organizational attention must shift from inside to outside. The firm inverts; it turns inside out. The management of human resources shifts from employees to crowds.18 Innovation shifts from in-house R & D to open innovation.19 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 management of externalities becomes a key leadership skill. 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 profitable, the chief locus of wealth creation is now outside rather than inside the organization.

No community manager or biz dev. Still talking about how much content we 'have'

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

How do we provide tools and services that make it easy for producers and consumers to interact in mutually rewarding ways?

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

whats the currency on 3DW?

every platform interaction starts with the exchange of information. This information enables the parties to decide whether, and how, to engage in any further exchange.

Exchange of information: end user gets to download a model (or access other BIM assets/data), BPM gets usage data/metrics/analytics, etc.

Exchange of currency. When goods or services are exchanged between platform participants, they are typically paid for using some form of currency. In many cases, this is traditional currency—money transmitted in one of a variety of ways, including credit card data, a PayPal transaction, a Bitcoin transfer, or (rarely) physical cash. However, there are other forms of value, and therefore other ways in which consumers “pay” producers in the world of platforms. Video viewers on YouTube or followers on Twitter pay the producer with attention, which adds value to the producer in a variety of ways. (If the producer is a political pundit or business leader, for example, he gains value in the form of growing influence as a thought leader; if she is a singer, actor, or athlete, she gains value in the form of a growing fan base.) Community members on sites like TripAdvisor, Dribbble, and 500px pay by enhancing the reputation of producers whose work they like. Thus, attention, fame, influence, reputation, and other intangible forms of value can play the role of “currency” on a platform.

As we’ll discuss in more detail in chapter 6, a platform’s ability to monetize the value of the exchanges it facilitates is directly related to the types of currency exchange it can capture and internalize. A platform that can internalize the flow of money may be well placed to charge a transaction cut—for example, the fee of 10 percent of the sale price typically charged by eBay after a successful auction. A platform that can capture only attention may monetize its business by collecting payments from a third party that considers the attention valuable—for example, an advertiser willing to pay Facebook for “eyeballs” attracted by posts related to a particular topic. 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

When we look at the BPM business, the value that's inherent to the exchanges are quite different, compared to say, a marketplace model, where content creators are more interested in selling their digital content than they are in selling their physical goods. BPMs who are interested in selling physical goods are interested in eyeballs, or better, qualified leads, or better, the actual sale of physical goods. Premium content creators would be interested in making money from the direct sale of their digital content.

The participants. There are fundamentally two participants in any core interaction: the producer, who creates value, and the consumer, who consumes value. When defining the core interaction, both roles need to be explicitly described and understood.

One nuance of platform design is recognizing that the same user may play a different role in differing interactions. The same person may be both a host and a guest on Airbnb, although he or she will typically perform only one of those roles in a particular interaction. On YouTube, users may upload videos as well as view them. A well-designed platform makes it easy for users to move from role to role.

It's likely in most cases that UGC contributors are also consumers. With BPMs it's likely a little different. As a "company" they are likely to both publish and consume content, but it's likely different people, working on different teams within the organization who do one vs the other.

The incentives that encourage different parties to participate are different, but the roles remain consistent.