Platform Revolution notes— Part 1

1. Today

How can a significant business segment be invaded and conquered in months by an upstart with no resources traditionally deemed essential for survival, let alone market dominance?

And why is this happening today in one industry after another?

The answer is the power of the platform. This new business model uses technology to connect people, organizations, and resources in an interactive ecosystem where tremendous value can be created and exchanged. Airbnb, Uber, Alibaba, and Facebook are just four examples from a list of disruptive platforms that includes Amazon, YouTube, eBay, Wikipedia, iPhone, Upwork, Twitter,

The platform is a simple-sounding yet transformative concept that radically changes business, the economy, and society. As we’ll explain, practically any industry in which information is an essential ingredient is a candidate for the platform revolution. That includes businesses whose “product” is information (like education and media) and any business where access to customer needs, price fluctuations, supply and demand, and market trends has value — which includes almost every industry.

A platform is a business that enables 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: is to consummate matches among users and facilitate the exchange of goods, services, or social currency, thereby enabling value creation for all participants.

Broken down in this way, the workings of platforms may seem simple enough. Yet today’s media, empowered by digital technology that annihilates barriers of time and space, and employs intelligent, sophisticated software tools that connect producers and consumers more precisely, speedily, and efficiently than ever, are producing little short of miraculous results.

Platforms beat pipelines because platforms scale more efficiently by eliminating gatekeepers.
Platforms beat pipelines because platforms unlock new sources of value creation and supply.
Platforms beat pipelines by using data-based tools to create community feedback loops.
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 to external activities. In the process, the tight inverts turn inside out, with functions from marketing to information technology to operations to strategy increasingly centering on people, resources, and processes outside the business, complementing or replacing those nside a traditional business.

The rise of disruptive platforms has enabled upstart companies to invade and conquer significant business segments in a matter of months, even without traditional resources deemed essential for market dominance. This is happening across various industries due to the power of the platform business model. Platforms connect people, organizations, and resources in an interactive ecosystem, creating tremendous value and enabling exchange. Examples like Airbnb, Uber, Alibaba, and Facebook showcase the transformative impact of platforms. Almost any industry reliant on information is a potential candidate for the platform revolution. Platforms facilitate value-creating interactions between external producers and consumers, providing an open infrastructure and setting governance conditions. Platforms outperform traditional pipelines by scaling efficiently, unlocking new sources of value, utilizing data-based tools for community feedback loops, and inverting the firm’s focus from internal activities to external activities centered around users and resources outside the business.

2. Network Effects

Network effects refer to the impact of the number of platform users on the value created for each user. Positive network effects refer to the ability of a large, well-managed platform community to produce significant value for each platform user. Adverse network effects refer to the possibility that the growth in numbers of a poorly-managed platform community can reduce the weight made for each user.

As we’ll see, positive network effects are the primary source of value creation and competitive advantage in a platform business. However, network effects can also be harmful, and in this chapter, we’ll explain how and why adverse network effects arise and what platform business managers can do about them. But understanding value creation via positive network effects is the essential first step.

In the twenty-first-century Internet era, near monopolies are being created by demand economies of scale (a term used by the two experts primarily responsible for popularizing the concept of network effects, Hal Varian, the chief economist at Google, and business professor Carl Shapiro).4 By contrast with supply economies of scale, 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 more extensive 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.

Metcalfe’s law is a helpful way of encapsulating how network effects create value for those who participate in a network and those who own or manage the network. Significant economic consequences follow from this pattern. Growth via network effects leads to market expansion. New buyers enter the market, attracted by the growing number of friends in the network. If prices also fall — as they often do when the technology matures and production quantities increase — then network effects work together with more attractive pricing to drive massive market adoption.

Price and brand effects are in a startup’s growth strategy. But only network effects create the virtuous cycle we described above, which leads to building a long-lastinglong-lasting network of users — a phenomenon we call lock-in.

Another growth-building tool that’s easy to confuse with network effects is virality. Derived from the expression “going viral,” virality is the tendency of an idea or brand to be circulated rapidly and widely from one Internet user to another.

Virality can attract people to a network — for example, when fans of an irresistibly cute, funny, or startling video persuade their friends to visit YouTube. But network effects keep them there. Virality is about attracting people off the platform and enticing them to join it, while network effects are about increasing value among people on-platform.

SCALING NETWORK EFFECTS: FRICTIONLESS ENTRY AND OTHER SCALABILITY TOOLS

As you can see, network effects depend on the network size. So one crucial result is that effective platforms can expand in size quickly and easily, thereby scaling the value that derives from network effects.

As the story of Google suggests, networks that permit frictionless entry can grow organically almost without bounds. 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 critical factor in enabling a platform to increase.

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

Network effects play a crucial role in platform businesses, where the number of users impacts the value created for each user. Positive network effects occur when a large, well-managed platform community generates significant value for users. Negative network effects can occur when a poorly-managed platform community reduces the value for users. Positive network effects are a vital source of value creation and competitive advantage. Demand economies of scale in the internet era, driven by social networks, demand aggregation, and app development, contribute to the value of larger networks. Metcalfe’s Law explains how network effects create value and lead to market expansion. Frictionless entry, allowing users to join and participate easily, is crucial for scaling network effects and facilitating rapid platform growth. In the world of network effects, user ecosystems are the new basis for competitive advantage and market dominance.

3. Architecture

interactions on a platform resemble any economic or social exchange, whether in the real world or the virtual world of the Internet. In every such business, the producer and the consumer exchange information, goods or services, and some form of currency.

Some platforms have more complicated models, but the basic structure remains the same:

Participants + Value Unit + Filter → Core Interaction

Platform design should prioritize the core interaction between producers and consumers. This interaction involves participants (producers and consumers) who play different roles and create value units. Value units, such as product listings or project details, are created by producers and delivered to consumers through filters. Well-designed filters ensure users receive relevant and valuable content, while a poorly-designed or absent filter can lead to user dissatisfaction and platform abandonment.

Platform design requires three essential functions: pull, facilitate, and match. Removing involves attracting producers and consumers to the platform to enable interactions. Facilitating consists in providing tools and rules that make connecting and encouraging valuable exchanges easy for users. Matching connects producers and consumers effectively using data to create mutually rewarding interactions. Platforms must overcome the chicken-or-egg problem of attracting users and ensuring their continued interest. Facilitation involves making value creation and exchanges seamless, reducing barriers to usage, and providing collaborative tools. Matching involves leveraging data to optimize filters and create relevant and valuable participant exchanges.

4. Disruption

Platforms are simple: they create a space where producers and consumers can interact and create mutual value. Platforms have economic advantages that allow them to grow faster than traditional pipeline businesses, leading to disruption in various industries. The rise of media is reconfiguring the processes of value creation, consumption, and quality control.

Value creation is being reconfigured as platforms minimize barriers to usage, tapping into new sources of supply. For example, Wikipedia and YouTube opened up new knowledge and video content sources by enabling volunteers and amateur creators to contribute. Platform businesses like Viki and Facebook have leveraged communities and user-generated content to fuel their growth.

Platforms lower hurdles for producers to encourage participation. Twitter’s 140-character format made content creation quick and easy, attracting more users as content producers. Airbnb and Uber provide support and incentives to lower economic barriers for hosts and drivers, respectively. Design platforms like Dribbble and Threadless democratize design tools, enabling a larger community of designers to participate.

Advancements in production technologies, such as smartphone cameras and 3D printing, contribute to the emergence of new groups of producers on platforms. However, innovative business design is often necessary to unlock the full potential of these technologies. For example, Amazon’s Kindle Publishing platform facilitated access to a large readership, leading to a new ecosystem of authors.

In summary, platforms reconfigure value creation by removing barriers to participation, tapping into new sources of supply, and leveraging technology and innovative business models.

The rise of platforms is disrupting traditional consumer behavior, as people now engage in previously considered strange or risky activities. Platforms like Lyft, Airbnb, and Feastly have enabled us to ride in strangers’ cars, stay in their spare rooms, and dine in their homes, fostering a new era of Internet-enabled intimacy. Trust-building mechanisms established by platform businesses have made these behaviors familiar and acceptable.

In the early stages, platforms often face criticism for lacking the quality and reliability of traditional competitors. YouTube had pirated and explicit content issues, Airbnb faced problems with unauthorized events in listed properties, and Wikipedia had inaccuracies in biographies. This decline in quality results from the abundance of supply platforms unlock.

However, over time, platforms improve their ability to curate and match consumers with high-quality content, goods, and services. Robust curation mechanisms discourage undesirable behavior and nurture quality, attracting a broader customer base. Traditional competitors find themselves suddenly competing with a fast-growing upstart.

As platforms scale, maintaining effective curation becomes crucial. Successful platforms gather user data and refine their matching algorithms. They gradually transition from manual curation by in-house editors to automated curation driven by community feedback loops. Platforms like Quora have implemented algorithms based on community judgments.

The rise of platforms introduces new business entities challenging incumbents and bringing about new forms of business activity. Changes in value creation, value consumption, and quality control are driving these transformations.

Structural Impacts of platform disruption
The rise of platform businesses is transforming the business landscape through three forms of disruption: de-linking assets from value, re-intermediation, and market aggregation.

De-linking assets from value involves separating ownership of physical assets from the value they create. This allows assets to be independently traded and applied to their most valuable service, increasing efficiency and value. Examples include platforms like Airbnb and Uber. In the business-to-business (B2B) arena, this concept can be applied to assets such as power generation plants or healthcare equipment. De-linking these assets from their owners can be utilized more efficiently and traded among users. For instance, a platform can facilitate the sharing of MRI machines among hospitals, increasing utilization rates and generating additional revenue.

Re-intermediation refers to the creation of new intermediaries or mediators through platforms. These intermediaries facilitate transactions between buyers and sellers, creating value by connecting participants in new ways. An example is the intelligent market platform designed for the state of New York, which enables small sellers of distributed energy resources to meet the demand of larger buyers. By coordinating and automating transactions, the platform improves the efficiency of the power system and encourages the adoption of renewable energy.

Market aggregation involves consolidating fragmented markets into larger, more efficient platforms. Platforms can enable the pooling of resources and create marketplaces where buyers and sellers can connect and transact. An example is Waterfind, a forum in Australia that allows farmers to trade water rights. By separating land ownership from water rights and creating a platform for water trading, the efficiency of water use increased, mitigating the impact of drought on farmers. Waterfind is now expanding its platform to the United States, aiming to apply the same solution to American agriculture.

These forms of disruption demonstrate how platforms are reshaping traditional industries by unlocking value, improving efficiency, and creating new market dynamics.

5. Launch

Platform marketing differs from traditional marketing, relying on pull strategies instead of push strategies. Creating awareness alone is not enough to drive adoption and usage in a world of abundance and distractions. Platforms must be designed to attract and engage users naturally. User commitment and active usage are critical indicators of success, and marketing must be integrated into the venue. While incumbents have advantages, platform markets' rapid and unpredictable nature levels the playing field, allowing startups to thrive if they understand and master the new growth rules.

EIGHT STRATEGIES FOR BEATING THE CHICKEN-OR-EGG DILEMMA

1. The follow-the-rabbit strategy: Build a platform business on the foundation of an existing pipeline or product business. Examples include Amazon, which started as an online retailer and opened its system to external producers through Amazon Marketplace, and Intel, which partnered with NTT to demonstrate the value of wireless technology.

2. The piggyback strategy: Connect with an existing user base from a different platform and stage the creation of value units to recruit those users to participate in your forum. Examples include PayPal piggybacking on eBay’s platform and Justdial in India borrowing business listings from yellow pages and employing feet-on-street soldiers to collect information.

3. The seeding strategy: Create value units relevant to at least one set of potential users, attracting them to the platform and attracting other users who want to engage with them. Examples include Google offering prizes to developers for creating Android apps and Adobe making all federal government tax forms available online to attract taxpayers.

The passage introduces two additional strategies for overcoming the chicken-or-egg dilemma in building a platform business:

4. The marquee strategy: Incentivize the participation of a key user group on your platform, as their involvement can significantly impact its success. This can be achieved through cash payments or special benefits. Examples include gaming companies like Microsoft, Sony, and Nintendo offering attractive partnership deals to game developer Electronic Arts (EA) to ensure exclusive access to popular games for their gaming devices.

5. The single-side strategy: Initially create a business that caters to a single set of users, providing products or services that benefit them. Once a sufficient user base is established, expand the business into a platform by attracting a second set of users who want to engage with the first set. Examples include OpenTable, which started by providing restaurant booking management software to restaurants and later expanded to serve consumers, and redBus, which began by offering a seating inventory management system to bus operators before opening the platform to consumers.

6. The producer evangelism strategy: Design the platform to attract producers who can then bring along their own customer base. Platforms like crowdfunding platforms (e.g., Indiegogo, Kickstarter) and education platforms (e.g., Skillshare, Udemy) leverage this strategy by providing infrastructure and tools for producers to connect with their customers. By catering to producers’ existing consumer base, the platform benefits from data-driven cross-pollination and attracts new consumers.

7. The big-bang adoption strategy: Utilize traditional push marketing strategies to attract a high volume of interest and attention to the platform, triggering simultaneous onboarding and creating a fully-developed network almost instantly. Examples include Twitter’s breakthrough at the SXSW festival by displaying real-time tweets on giant screens, Foursquare’s success at the same festival, and Tinder’s launch at a university party. However, this strategy may not be applicable to all platforms and requires a relevant opportunity for a significant influx of users.

8. The micromarket strategy: Begin by targeting a small market where interactions are already happening, allowing the platform to provide effective matchmaking even in the early stages. Facebook’s launch at Harvard University is cited as an example, as it leveraged the concentrated community to create an active user base and improve the quality of interactions. By focusing on a micromarket, platforms can reduce the critical mass required to initiate interactions and facilitate matchmaking.