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Platforms are driving an ever-transforming global marketplace — revolutionizing business connectivity, scalability, and consumer participation.

In Platform Revolution: How Networked Markets are Transforming the Economy and How to Make Them Work for You, authors Geoffrey G. Parker, Marshall W. Van Alstyne, and Sangeet Paul Choudary, explore the ways platforms are becoming a pervasive business model across every major industry. To give you an idea of how impactful platforms are, 13 of the most recognizable, popular 32 brands in the world are platforms (e.g., Apple, Google, Microsoft, IBM, Samsung, Amazon, Intel, Cisco, Oracle, Facebook, American Express, SAP, and eBay).

While the global economy is relatively balanced across continents (North America, Asia, Europe, and Africa, Latin America, and ROW combined), the platform economy distribution is unbalanced, leaning heavily towards North America with Asia in second. North America is home to the most $1 billion and overvaluation platform companies. China is racing to catch up — with the growth of China’s platform companies growing exponentially quarter after quarter. Europe settles into third behind North America and Asia with a “fragmented market,” and less than a quarter of the platform valuation of North America.

Of the 115 “global unicorns” – companies valued at over $300 billion – 70% (or 80 companies) are platform business models. Multinational platforms have effectively taken over with over $3 trillion in firm market cap — industries from agriculture, communication, and networking, consumer goods, education, energy, healthcare, finance, gaming, professional services, logistics, media, retail, transportation, travel and more are represented.

The authors of the Platform Revolution emphasize that the revolutionary business power of the platform has already transformed many major industries. And more equally important transformations are on the way. Let’s take a step back and examine a few foundational elements of strong platforms.

Key Platform Concepts

  1. A platform is a nexus – Described in Platform Revolution, is a nexus of rules and open infrastructure, enabling value-creating interactions between external producers and consumers. A platform’s overarching purpose is to consummate matches among users and facilitate the exchange of goods, services or social currency, facilitating value creation for all participants. Because of the way platforms are constructed and governed, platforms can scale much faster than pipeline business because they are not susceptible to the same external production constraints (i.e., platform businesses don’t own or control resources). Examples of platforms, include Apple iPhone, Uber, Facebook, and Amazon.
  2. Platforms encompass three key shifts – (1) From resource control to orchestration; (2) From internal optimization to external interaction; and (3) From a customer value-focus to an ecosystem value-focus. Because of these shifts, firms must have a thorough understanding of their relation to platforms, whether that is as a provider, partner, potential partner or competitor. Firms must then evaluate data assets and create a data strategy. Investing in governance ensures that the firm will attract the right partners and their investments.
  3. The best platforms have strong network effects – Unlike the linear pipeline (i.e., raw materials > production > assembly > distribution), a platform is architected much like a triangle. Sourced content is edited and curated, and then bundled and distributed through multiple channels. Through these triangular loop-exchange platforms create network effects. Network effects connect more users to more value, which in turn attracts more users. To best leverage the power of network effects, firms must shift from the inside to the outside (it’s easier to scale from the outside-in, which is highly contingent on a community strategy).

Because of the integral role that network effects play in successful platform models, Platform Revolution dedicates a whole chapter to further examination.

Network Effects

Network effects are driving value creation and competitive advantage in platform businesses, and as noted in the previous section, in today’s economy. Network effects seize opportunities to build community, and in this section, Platform Revolution shares more about supply vs. demand-side economies, as well as the role network effects,  play in increasing a platform’s power.

Network effects face distinctive challenges. These can include business complexity, rapid growth (which may preclude trial-and-error), and/or the winter takes most or all. Network effects success stories, include Windows, Adobe, iPod/iPhone, Alibaba, LinkedIn, and Facebook. On the flip-side, high profile network effect failures include Betamax, IBM OS/2, Amazon auctions, eBay Japan, MusicNet, N-Gage, and Blackberry.

Network effects are demand-side economies. As a platform’s network effects increase, existing and prospective users’ willingness-to-pay (and willingness to participate) also increases. Many businesses that exhibit network effects also benefit from strong supply-side scale economies. Platform Revolution authors emphasize that network effects are not the same as price effects, brand effects, or other familiar growth-building tools.

Supply-side economies occur when firms lower unit costs by leveraging fixed costs or experience effects (i.e., with high fixed costs and low unit costs, average costs decline with volume). Successful firms of the Industrial-era — historical landmarks of supply-side economies of scale include the Electric Dynamo in 1893, the Ford Model T in 1908, Standard Oil in 1909, and Acklam Ironworks in 1924 — were made possible by supply economies of scale, whereas today’s giants are made possible by demand economies of scale — expressed as network effects.

To illustrate the power of platform network effects, let’s look at the Apple iPod. Before it added a music and audio platform, the Apple iPod followed a standard linear value chain with minimal network effects. Once it was combined with iTunes and Apple Music, the Apple iPod was part of a triangular platform supply network. Apple-owned the financial chokepoint, reaping more monetary and influence benefits. Through helping users find and access content, Apple’s platform products and services created stronger network effects.

A two-sided market with producers and consumers creates four effects: A same-side effect for each side (consumer-to-consumer, producer-to-producer); and a cross-side effect in each direction (consumer-to-producer, producer-to-consumer). The polarity between any of these effects can also be positive or negative. Growing platform businesses must manage all four types of effects.

In the case of a winner-takes-all market, one of these three scenarios begins:

  1. Large supply/demand effects, costs fall or value rises with volume
  2. Large multi-homing costs, consumers tend to choose just one; and
  3. Niche specialization is low, differentiation creates protect markets not swamped by scale economies.

The next key concept in the Platform Revolution is architecture and design — understanding how to harness the power of the platform to work best for your firm.

Architecture & Design

Platforms re-envision the traditional value chain, designed to facilitate three kinds of exchange: information, goods/services, and currency. Unlike the traditional value chain where value is created within the business’ pipeline – where the producer owns the pipe, adds value and controls the process, and the value flow is linear – a platform creates value on the outside. On a platform, the producer role is distinct from the platform. In addition, the platform curates and controls movement, offering network matching as a value flow.

“In 2015, 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 hotelier owns no real estate,” said Tom Goodwin, Sr. VP of Strategy Havas Media.

Uber is an effective example of the power of the platform. Founded in 2008, it identifies spare capacity and scales across boundaries — operating in over 34,000 cities and 180 countries with over 1 million listings.

Platforms are not in the business of building functionality, the goal is to enable interactions. Three key elements define the core interaction: participants, value unit, and filter. The value unit is integral, and often the most difficult to control.

As a platform grows, it often finds ways to expand beyond the core interaction. New kinds of interactions are layered on top of the core interaction, often attracting new participants in the process. Here are three ways that the platform is optimized by designing architecture to support a network, tools, and data:

  1. Design the network to get both roles on board
  2. Provide the tools to interact and exchange value
  3. Use data to make the best match

While a platform should make valuable interactions easy for large numbers of users, it is also important to leave room for serendipitous and unexpected experiences, with the intention that users will find new ways to create value on the platform.

In the last section, the Platform Revolution authors share how platforms are conquering and transforming traditional industries.

How Platforms Conquer & Transform Traditional Industries

The disruption of business by the Internet has evolved through two stages — in stage one, efficient pipelines ate inefficient pipelines; in stage two, platforms eat pipelines. Newspaper and media retailers are two industries that are facing tremendous pressure, as online pipes’ superior marginal economics of production and distribution. Platforms emerged into traditional print news and classified markets. Platforms, such as Craigslist, eBay and The Huffington Post diverted from the path of aggregation and classified ad venue with the superior economics of social curation.

Platforms are able to outcompete pipelines because of their superior marginal economics and because of the value produced by positive network effects. As a result, platforms are growing faster than pipelines and taking leading positions in industries once dominated by pipelines. Additional examples of platform disruption, include:

  • Airbnb disrupted the travel hospitality giant by diverting the path with low-cost new supply, fixed costs covered and low variable costs, resulting in trust and insurance.
  • Traditional bricks and mortar schools are under pressure to evolve. To solve the problem educational institutions offer certifications, offering a new supply and breaking the bundle.

The rise of platforms is also disrupting business in other ways. It is reconfiguring value creation to tap new sources of supply; reconfiguring value consumption by enabling new forms of consumer behavior and reconfiguring quality control through community-driven curation. Published in 2010, Platform Revolution is a prophetic look at how platforms are continuing to upend and dominate digital economies around the globe. Platform business models are conquering and transforming traditional industries through re-envisioned architecture and design, as well as offering network effects.