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

6. The producer evangelism strategy: Design your platform to attract producers, who can induce their customers to become users of the platform.

7. The big-bang adoption strategy. Use one or more traditional push marketing strategies to attract a high volume of interest and attention to your platform. This triggers a simultaneous on-boarding effect, creating an almost fully-developed network virtually instantaneously.

8. The micromarket strategy. 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.

Viral growth is a pull-based process based on encouraging users to spread the word about the platform to other potential users. When users themselves encourage others to join the network, the network becomes the driver of its own growth.

Similarly, four key elements are necessary to begin the process of viral growth for a platform business—the sender, the value unit, the external network, and the recipient. Let’s consider the viral growth of Instagram: • The sender. A user on Instagram shares a picture that he has just created. This launches the cycle that will eventually bring in a new user. • The value unit. On Instagram, the value unit is the picture that the user shares with friends. • The external network. For Instagram, Facebook serves as a very effective external network, allowing value units (photos) to spread and be exposed to potential users. • The recipient. Finally, a user from Facebook gets intrigued by the picture and visits Instagram. This user may create her own photo and start the cycle all over again. Now the recipient is acting as the sender.

These founders shouldn’t charge either side to be listed on their platform. Doing so would put terrible friction on entry into the ecosystem, discouraging many potential participants from becoming users. To charge for posting a deal simply means people post fewer deals. That’s bad. It reduces potential interaction volume, not to mention realized interactions. As a result, it also reduces the volume of data available to the platform—data desperately needed to enable the platform to forge powerful matches between consumers and producers. In fact, rather than charging users to join the platform, the founders should be subsidizing their participation—perhaps by providing tools and services to make it easy, fast, and effective for them to complete their profiles.

Any charge levied on users is likely to discourage them from participating on the platform. 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.

This value falls into four broad categories: • For consumers: Access to value created on the platform. Video viewers find the videos on YouTube valuable; Android users find value in the various activities made possible by the apps; students on Skillshare find value in the courses made available through the site. • For producers or third-party providers: Access to a community or market. Airbnb is valuable for hosts because it provides access to a global market of travelers. Company recruiters find LinkedIn valuable because it enables them to connect to potential job-seekers. Merchants find Alibaba valuable because it enables them to sell their products to customers around the world. • For both consumers and producers: Access to tools and services that facilitate interaction. Platforms create value by reducing the friction and barriers that prevent producers and consumers from interacting. Kickstarter helps creative entrepreneurs raise money for new projects. eBay, combined with PayPal, allows anyone to start an online store that serves customers anywhere in the world. YouTube allows musicians to provide their fans with performance videos, without having to produce physical products (CDs or DVDs) and without having to sell through intermediary retailers. • For both consumers and producers: Access to curation mechanisms that enhance the quality of interactions. Consumers value access to high-quality goods and services that address their specific needs and interest...

This was the growth of negative network effects. As the platform grew, with low barriers to planning a meetup, many meetups were being started without a clear purpose or adequate planning. There was a lot of noise on the platform, leading to disappointing experiences for users, who would sign up for a meetup only to discover that attendance was small and activity minimal.

But despite the backlash, the strategy worked. The number of meetups promoted on the site fell drastically, but their quality, and therefore the quality of the interactions generated, improved significantly. As Heiferman explained in an interview five years later, “The big headline, by the way, in going from free to fee for us is: Yeah, we lost 95% of our activity but now we have much, much, more going on than we ever did before and half the Meetups are successful, as opposed to 1–2% being successful.”5

Meetup’s monetization model helped it achieve exactly that. By discouraging organizers who weren’t serious about their objectives, the pricing mechanism created a culture of quality on the platform.

WAYS TO MONETIZE (1): CHARGING A TRANSACTION FEE

Charging a transaction fee is a powerful way of monetizing the value created by the platform without hampering the growth of network effects. Because buyers and sellers are charged only when an actual transaction occurs, they are not discouraged from joining the platform and becoming part of the network.

WAYS TO MONETIZE (2): CHARGING FOR ACCESS

This form of monetization creates interactions that benefit both parties.

WAYS TO MONETIZE (3): CHARGING FOR ENHANCED ACCESS

Sometimes a platform that facilitates a monetary transaction may be unable to own, and hence to monetize, the transaction. Such platforms may instead charge producers for enhanced access to consumers. This refers to the provision of tools that enable a producer to stand out above the crowd and be noticed on a two-sided platform, despite an abundance of rival producers and the resulting intense competition to attract consumer attention.

WAYS TO MONETIZE (4): CHARGING FOR ENHANCED CURATION

WHOM SHOULD YOU CHARGE?

The problems Wikipedia faces in maintaining high quality while maximizing its accessibility to all the users who want to contribute to its content illustrate the challenges inherent in managing an open platform model. Yet the obvious solution—to close down the model and institute strict controls over participation—has a huge downside. Increasing the friction involved in actively using any platform inevitably reduces participation and can even destroy the value-creation potential of the platform altogether.

Being closed isn’t simply a matter of absolutely forbidding outside participants on the platform. It may also involve creating such onerous participation rules that would-be users are discouraged, or charging such excessive fees (or “rents”) that the profit margins of potential participants are reduced below sustainable levels.3 The choice between open and closed isn’t a choice between black and white; there is a spectrum between the two extremes.

Jobs liked to recast the open/closed dilemma as a choice between “fragmented” and “integrated,” terms that subtly skewed the debate in favor of a closed, controlled system. He wasn’t completely wrong: it’s true that, the more open a system becomes, the more fragmented it becomes. An open system is also more difficult for its creator to monetize, and the intellectual property that defines it is more difficult to control. Yet openness also encourages innovation.

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.”

There are three kinds of openness decisions that platform designers and managers need to grapple with. These are: • Decisions regarding manager and sponsor participation • Decisions regarding developer participation • Decisions regarding user participation

Behind any platform, with responsibility for its structure and operation, are two entities: the firm that manages the platform and directly touches users, and the firm that sponsors the platform and retains legal control over the technology.

One of the crucial decisions a platform manager must make—and often reconsider as the market evolves—is the extent to which the platform will be open to extension developers.

If you are a platform manager, you don’t want to let an outside firm control a primary source of user value on your platform. When this happens, you need to move to take control of the value-creating app—most often by buying the app or the company that created it.

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.

Good governance is important in both nation-states and platform businesses because absolutely free markets, in which people and organizations interact with no rules, restrictions, or safeguards, can’t always be relied upon to produce results that are fair and satisfactory to those involved.

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 care. 5. All service interfaces, without exception, must be designed from the ground up to be externalizable. That is to say, the team must plan and design to be able to expose the interface to developers in the outside world. No exceptions. 6. Anyone who doesn’t do this will be fired. 7. Thank you; have a nice day!

Having a person’s name and email address on a membership list doesn’t promise success for a platform. What matters is activity—the number of satisfying interactions that platform users experience.

key numbers like cash flow, inventory turns, and operating income, as well as ancillary metrics like gross margin, overhead, and return on investment. These tools, in their varied ways, help to measure the same thing: the efficiency with which value flows through the pipeline.

Platforms exist to facilitate positive interactions among users—particularly between producers and consumers of value. The greater the number of positive interactions the platform creates, the more users will be drawn to the platform, and the more eager they will be to engage in activities and interactions of various kinds on the platform. Thus, the most important metrics are those that quantify the success of the platform in fostering sustainable repetition of desirable interactions.

Whereas a pipeline manager is concerned with the flow of value from one end of the pipeline to the other, the platform manager is concerned with the creation, sharing, and delivery of value throughout the ecosystem—some occurring on the platform, some elsewhere. For a platform manager, process efficiencies and system enhancements may be quite important—but only insofar as they facilitate successful interactions among users.

One reasonable way to measure liquidity is by tracking the percentage of listings that lead to interactions within a given time period.

Illiquid situations discourage users from participating in the platform and so must be kept to a minimum.

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.

metrics suitable for information technology platforms that have reached the maturity phase should meet three major requirements: they should drive innovation, have a high signal-to-noise ratio, and facilitate resource allocation.14

A platform may also choose to innovate when features provided by third parties become a large part of the overall value enjoyed by users.

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.

“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.18

Porter’s model identifies five forces that affect the strategic position of a particular business: the threat of new entrants to the market, the threat of substitute products or services, the bargaining power of customers, the bargaining power of suppliers, and the intensity of competitive rivalry in the industry. The goal of strategy is to control these five forces in such a way as to build a moat around the business and thereby render it unassailable.

The implicit assumption in traditional business strategy that competition is a zero-sum game is far less applicable in the world of platforms. Rather than re-dividing a pie of more-or-less static size, platform businesses often grow the pie (as, for example, Amazon has done by innovating new models, such as self-publishing and publishing on demand, within the traditional book industry) or create an alternative pie that taps new markets and sources of supply (as Airbnb and Uber have done alongside the traditional hotel and taxi industries). Actively managing network effects changes the shape of markets rather than taking them as fixed.

Strategic advantage is based not on the attractiveness of particular products or services but rather on the power of entire ecosystems.

platforms: Platforms seek exclusive access to essential assets. They do this, in part, by developing rules, practices, and protocols that discourage multihoming.

The open-ended nature of platforms creates enormous opportunities for users to create new value. Platform managers can build their businesses by, first, giving partners frictionless opportunities to innovate, then capturing some or all of the value created by acquisition or duplication.

Platform businesses can use data to improve their competitive performance in two general ways—tactically and strategically.

Classic merger and acquisition (M & A) strategy suggests that business leaders should pursue targets that either add complementary products or market access or subtract supply chain costs.

Platform managers need to continually scan the horizon, observing the activities of other platforms—particularly platforms that serve similar or overlapping user bases. We call these adjacent platforms. When a new feature appears on an adjacent platform, it may represent a competitive threat, since there’s a possibility that users of your platform may find the new feature attractive enough to begin multihoming or even to abandon your platform altogether.

In some cases, superior platform design enables a platform to dramatically outcompete a preexisting rival.