2 years, 6 months ago

On the Nature of Platforms

Link: http://feedproxy.google.com/~r/Soapbox/~3/nt0K56efO4I/on-nature-of-platforms.html

There are several ways of thinking about platforms.

Economists tend to view platforms as essentially containers for transactions. Canonical examples: Amazon, Airbnb, iTunes, Netflix, Uber.

One of the economic advantages of these transaction platforms is that they also act as container for content. When it launched in 1995, the Amazon website boasted a million books – far more than you could find in any bookshop. (This is related to the concept of the Long Tail.) So it becomes a place you can browse books and check reviews, independently of any intention to buy.

Transaction platforms may also enable a significant reduction in transaction costs. This creates an opening for micro-transactions of various kinds – in other words transactions that would previously have been too small to be economically viable. Smaller-grained transactions can allow previously under-utilized assets to be used more economically – for example selling an empty passenger seat on a car journey.

Transaction platforms may also act as a container for data and/or metadata. Dave Chaffey describes “Customers Who Bought X … Also Bought Y” as Amazon’s signature feature. (Amazon.com case study, 30 June 2014)

This notion of platform can be extended to containers of other modes of activity or collaboration or exchange, where there may be no direct financial transaction. Canonical examples: Facebook, PlayStation Network, Linked-In, Skype.

There are various business models underlying these activity platforms, including freemium (Linked-In, Skype), post-sale delivery and engagement (PSN), and advertising. As many people have observed, Facebook inherits a principle that was originally formulated for commercial television – if you are not paying, you are the product. In other words, the underlying transaction is the one between Facebook and its advertisers, whereby Facebook rents out the user to its paying customers.

These platforms are typically described as two-sided or multi-sided. Among other things, multi-sidedness implies some choices about pricing strategy – how to distribute the costs and added-value of the platform between the different sides. For example, credit card provides a transaction platform between consumers and merchants – the credit card company has a choice whether to charge everything to the merchants or to charge the consumers as well. And Facebook and Google provide user services for free, although perhaps one day we shall be so addicted to their services that they can make us pay hard cash to continue.

A different way of thinking about platforms is as a container for capabilities or services. Here, the canonical example would be Amazon Web Services (AWS). At the CBDI Forum, we were writing about AWS over ten years ago, but many people only became aware of AWS when it grew into a massive business in its own right. (Amazon and eBay, August 2004)

The key idea here is that you can build a business on top of a platform. Thus a start-up online retailer doesn’t need to build all the necessary capabilities in-house, because there is a platform of services already available. In the 1990s, telecoms companies were looking for ways to create value-added services on top of the basic communication platforms.

Many companies already have a platform, but they are trying to raise it. For example, the traditional role for telecoms companies is as a platform of telecoms connectivity. But it has been obvious for ages that there is no long-term profitability for telecoms from providing services at this level. So telecoms companies have long understood the need to raise the platform, to offer higher-value services. But they are still struggling to formulate and implement this strategic change. Why is it so difficult? (Business as a Platform, March 2006) 

Similar structures can be found in the physical world. In addition to managing real platforms at railway stations, Network Rail provides a “platform” on which the train operating companies can run their business. In theory these are services with strict service level agreements and contractual or regulatory penalties, although the actual stack geometry is arguably flawed. (Business Service Architecture – Railway Edition, June 2006)

In retail, some large department stores have turned themselves into marketplaces in which franchise retailers can sell their products. Other retailers have experimented with a business model in which the goods are owned by the supplier up to the point at which they are purchased by the supplier. Thus the store becomes a platform for the supplier to merchandise and sell products. See also Nick Vitalari, Walmart and The Power of the Business Platform (Sept 2011).

Platforms are sometimes described as more or less open or closed. For example, the Open Banking Platform. Platform controllers often seek to impose quality or technical constraints on businesses using the platform – for example, Apple iTunes. Thus the notion of openness has a range of meanings, from market openness (e.g. no barriers to entry and exit) to technological openness (e.g. flexibility of mechanism). (Types of Openness, November 2001)

So when business strategy consultants talk about a platform business, this can also refer to the flexible and open-ended exploitation of an asset or capability, to create or co-create value in as many ways as possible. For example, here is John Hagel in 2006, talking about Steve Jobs and Disney.

In a world of scarce attention, creators of media products will need to compete with those who re-conceive media products as platforms. What is the difference? Products are designed to be used on a standalone basis – you buy it and you view it or listen to it in the specific way the content creator intended. Platforms are designed to be built upon – they create opportunities for the original creator, third parties or the customers themselves to extend, enhance and tailor the content in ways that the original creator never anticipated. Offered as a platform, content can create far more value than any equivalent standalone product. (Disney, Pixar and Jobs, Feb 2006)

Finally, we may note that although many of these platforms may be described as “digital”, many of the same basic characteristics can be found in both digital and non-digital modes. And what even counts as “non-digital” these days, when every aspect of our lives can be wired to the Internet? So I prefer not to talk about digital platforms any more – they are just platforms.

Further Reading

Philip Boxer, What Distinguishes a Platform Strategy? (Asymmetric Design, May 2012)

Diane Coyle, The Social Life of Platforms (Enlightenment Economics, May 2016)

For John Hegel’s latest thinking about platforms, see The Big Shift in Business Platform Models (Edge Perspectives, January 2017)

Related posts: Business Geometry (September 2004), Multi-Sided Platform Strategies (April 2013)