All of the most valuable firms in the world today are platforms, starting with Apple, Microsoft, Google and Amazon. But platforms do not evolve in predictable ways, and there is a lot that managers and entrepreneurs can learn about past, present, and future platform strategies.
To shed light on the challenges and opportunities posed by digital platforms, The Business of Platforms: Strategy in the Age of Digital Competition, Innovation, and Power is a new book by Harvard Business School Professor David B. Yoffie and coauthors Michael A. Cusumano and Annabelle Gawer.
Across seven chapters the authors explain the fundamentals of platforms, different strategies and business models, common errors, and platform battlegrounds of the future that involve competing technologies and implications for organizations. There is advice for traditional firms looking to build or join platforms, as well as for entrepreneurs and startups. The authors discuss issues of power and of managing privacy, fairness, and public trust.
Martha Lagace: What trends are you seeing around platforms?
David Yoffie: The first question one must ask is: Are platforms the dominant business model of the twenty first century? Today, the world’s largest taxi company (Uber) owns no cars; the world’s largest provider of accommodations (Airbnb) owns no real estate; and the world’s largest retailer (Alibaba) owns no inventory.
Modern platform thinking has been evolving for the past 30 years. Academic and practitioner interest in the subject was initially stimulated by the explosive growth of the Microsoft Windows operating system. The real value of Windows, we learned, was not about the product, per se, but the applications written by independent software vendors. As a result, most of the early research on platforms was focused on what we call today innovation platforms.
With the emergence of Amazon, eBay, and other firms in the late 1990s and early 2000s, it was clear that a very different kind of technology platform was emerging, which we call transaction platforms. These platforms have their antecedents going back thousands of years to bazaars, but technology has enabled platforms to be globally scalable, which had never previously been possible.
While many people lump innovation and transaction platforms together, we argue that they are very different animals. Furthermore, in the last 10 years, we have also seen a new type of platform company emerge, which we call hybrids. A hybrid is a company that has both an innovation and a transaction platform operating simultaneously within the organization. In some cases they’re deeply linked. In other cases they are simply separate pieces of an organization that operate under a corporate umbrella. For example, Google Search is a classic transaction platform that connects end users to advertisers, and the Android operating system is a classic innovation platform that enables third parties to write new applications that create value for Android phones.
“While many people lump innovation and transaction platforms together, we argue that they are very different animals.”
We argue in The Business of Platforms that hybrids like this will become more important over time. Even if you’re running a pure transaction platform today, you may see the opportunity to create open interfaces—APIs, or application programming interfaces—that enable third parties to build on your platform. Even highly focused transaction platforms like Uber have opened up APIs to enable third parties to add value. This is an inevitable trend of digitization.
Lagace: In your research, you identified 209 platform failures between 1995 and 2015 and about 45 successful firms for the same period. What are drivers of success?
Yoffie: The most important driver of success is network effects. Network effects create the opportunities to scale at incredible speed and the potential for winner-take-all or winner-take most businesses. But network effects are not enough. This is a common misconception, that any business with strong network effects will produce a winner-take-all outcome. The evidence suggests that simply isn’t true. Network effects are a necessary but not sufficient condition.
Beyond network effects, successful platforms make it hard for their users to multihome. Multihome means users can participate on multiple platforms at the same time. In the old days, it was hard to use both a Windows PC and a Mac because of incompatibilities. Whenever there are switching costs, multihoming is hard, which makes it complicated for firms or individual users to switch from one platform to another.
The next criterion we identify is relatively homogenous products and a lack of identifiable niches. The more heterogeneous the market, the more fragmented it inevitably becomes, which lowers the likelihood of a winner-take-all outcome.
Lastly, the truly successful firms in a platform world tend to have meaningful supply-side scale economies. Markets with large economies of scale generally have higher barriers to entry, and they are more likely to tip.
Lagace: Since most platform launches fail, what mistakes should managers and entrepreneurs avoid?
Yoffie: We see four common problems across the data. The number one problem is how to price the product. The vast majority of platforms require subsidies on one or both sides of the platform for some period of time. Failure to get that pricing right inevitably leads to decline. You can see examples in businesses like ridesharing. The first player in the space was a company called Sidecar that never was able to figure out the right pricing to drive market demand or attract new drivers to the platform. Sidecar ended up a casualty of both Uber and Lyft’s aggressive pricing policies.
A second common mistake is the failure to build, establish, and maintain trust. Platforms by their very nature require two unfamiliar parties to do business with each other, which means they may not know each other and have no reason to trust each other. Without trust, many transactions will never materialize. A crucial feature of any platform is enabling and creating a trust environment allowing independent parties to feel comfortable that they’re not putting their business, operation, or personal wealth at risk.
A third mistake is mistiming the market. It’s possible to be too early, which is not often the big problem, but it is more problematic to be too late. This is because of the power of network effects and the power of platforms to scale very quickly. Even if a firm has a better product, if it is too slow in developing customers on each side of the platform, it can still lose out. A great example was Microsoft’s failed efforts in smartphones. Microsoft built a very good operating system for smartphones, but it could not crack the market because its product came out five years after the iPhone and four years after Android. By then, there were already hundreds of thousands of applications written for the other operating systems. Even though Microsoft may have had the best of the three operating systems, it didn’t matter because it was simply too late.
The fourth common mistake is hubris. When firms are very successful in the early stages of a platform they often think the market has tipped and they don't need to worry about competition and new technology. They lose their paranoia. The reality is, even in markets with strong network effects, it’s possible for competitors to overturn a leader’s advantage.
Lagace: What advice do you have for conventional firms looking to explore platforms?
Yoffie: There are three potential strategies. You can belong to an existing platform, buy a platform if time to market is critical, or build one if you want to control your ecosystem.
None of these strategies are without risk. Belonging to a platform is a way to quickly participate in a platform market. The challenge is to avoid the problem of “hold up” by the platform itself—that is, how do you prevent the platform from extracting most of the value? How do you prevent it from observing what you do and then simply copying it? Nonetheless, belonging to a platform is a way to engage in a platform market quickly at relatively low cost and learn the tools of the trade. In the book, we explore a number of “belong” strategies which have delivered excellent results.
Buying a platform is a higher risk, higher cost strategy, but it accelerates engagement in platform businesses. For some companies, it may be the best way to get the talent and culture required to operate a platform. The example we use in the book is Walmart trying to compete with Amazon. Walmart largely failed in the platform retail business for 20 years. Its acquisition of Jet.com, however, let Walmart aggressively expand the top line of its platform revenue and bring in a team that understood platforms. Although still far behind Amazon, Walmart’s acquisition of Jet.com finally turned Walmart into a serious online competitor.
Lastly, the hardest problem in responding as a conventional firm is trying to build your own platform. To be honest, very few firms have been successful. A lot have tried. It is something large, established firms under the right circumstances need to put on the agenda as an option they might pursue. In the book, we discuss General Electric’s efforts to build their Predix platform. Predix was clearly going to be a multiyear, maybe multibillion dollar investment and one that was increasingly difficult for GE to afford. But it’s a great example of recognizing the potential that platforms can create even within a very traditional, industrial business. We think the basic design of Predix was heading in the right direction, but the challenges in execution have been severe.
Lagace: A central concern of The Business of Platforms is the double-edged sword nature of platforms and its impact on business.
Yoffie: Platforms really are double-edged swords. They are some of the most valuable, efficient ways to organize commerce, and they are also a potential source of violence, disinformation, antitrust abuse, worker abuse, racism, misogyny, and the list goes on. In other words, the fundamental challenge we see in platforms is that they are vehicles for good as well as evil. And the vast majority of platforms in the last 10 years were only focused on the good and not on the potential for evil.
There are two theories about how to think about platforms today. We clearly are in one camp and not the other. One theory is that digital platforms are like the public square. Anybody should be allowed to do anything: it’s a world of free speech, and let the buyer beware.
The other theory is that these are environments that reflect the values and philosophy of the companies themselves. They are not a public square, and companies therefore have roles and responsibilities to their communities. Platforms have to maintain the efficiency on one hand and reduce the potential for evil on the other. This is a controversial position.
We write about a number of different elements of this problem. One, obviously, is the antitrust problem that has become a big issue in the current US elections. We argue that once these firms become dominant, many have engaged in bullying behavior. Some of these actions were perfectly legal when the companies were small. But these same actions became unnecessary (and in some cases illegal) when the big platforms became dominant. Nonetheless, leading platform firms have been slow to adjust to nonbullying behavior. A lot of the antitrust problems could go away if they could internally think of themselves as a dominant player, rather than continue to operate as if they were entrepreneurs trying to build the business from scratch.
“Twitter, YouTube, and Facebook … are going to have to find ways to curate, ways to say certain kinds of activities are unacceptable, and if users are not happy, they should just go to another platform.”
Probably the most controversial thing that we discuss in the book is the question of whether platforms need to be curated. Curation would try to eliminate disinformation, fake news, promotion of violence, and so on. Is it up to the platform to prevent that activity from occurring? Should it be done by third parties or by members of the platform community policing themselves? Facebook, for example, has about 30,000 people working on curation of the Facebook platform. The problem is there are more than 2.5 billion users. Thirty thousand people, even with the help of AI and sophisticated big data algorithms, simply are not able to catch up.
We argue that curation is going to need to become more important. There will be costs associated with it, but ultimately it’s about maintaining and establishing trust. If the platform loses the trust of one or both sides of the market, it will disappear. And ultimately it's the platform’s responsibility to ensure that their users can trust the platform itself.
Yes, it is a philosophical change in approach. These are companies that were built as the town square, with the philosophy of “we don’t need to worry about this misuse because the ecosystem will take care of itself.” Potentially restricting free speech is anathema to many of the users as well as many people inside the company.
It is a wrenching problem. If you look at Twitter, YouTube, and Facebook, the three biggest platforms where this has become a serious problem, all three of them are struggling to address this challenge. Our argument is that they are just postponing the inevitable. They are going to have to find ways to curate, ways to say certain kinds of activities are unacceptable, and if users are not happy, they should just go to another platform. But that does mean giving up some potential revenue, which is also difficult for a public company to do.
About the Author
Martha Lagace is a writer based in the Boston area.
[Image: metamorworks]
Book Excerpt
Launch: Solve the “Chicken-or- Egg” Problem
By David B. Yoffie, Michael A. Cusumano, and Annabelle Gawer.
Launching a platform and solving the chicken-or-egg problem is probably the most difficult challenge for platform strategists. When side A’s volume depends on side B, and side B’s volume depends on side A, how do you get started? Here again, innovation and transaction platforms need to approach this dilemma differently. Strategic choices generally fall into three categories: (1) Create stand-alone value for one side first, (2) subsidize one or both sides, and (3) sometimes bring two sides on board simultaneously.
Innovation platforms
Creating stand-alone value for one side—such as users—requires that the firm produce a strong product or service that does not initially need third-party complementary innovations. Third-party innovations may make the product even more valuable, and this is when a product can evolve into an innovation platform, provided that it has the right attributes. First, the product must be designed in such a way that it has “hooks” for outside firms to connect (like application programming interfaces for software platforms). Second, it must also be modular enough in design for outsiders to add significant innovations. Third, the company must facilitate easy access to the product’s core functionality, such as through inexpensive or free licensing terms.
One strategy for launching an innovation platform in a market where no platforms exist yet is to identify an industry-wide problem. Then offer your product as a solution to that problem, or at least as a “core” or essential ingredient for the solution. In prior writings, we called this strategy “coring.”5 There are several examples. In order to solve the problem of how to build an IBM-compatible personal computer during the 1980s, which IBM tried to control as a proprietary product and platform technology, Microsoft and Intel broadly licensed or sold the core ingredients, the MS-DOS operating system (followed by Windows) and the x86 microprocessor. Similarly, in the late 2000s, Google offered the Android operating system as a solution for handset makers that wanted to build smart-phones with capabilities similar to Apple’s iPhone. ARM also made its microprocessor design the technology of choice for companies that wanted to build smartphones that used relatively little battery power.
When it comes to generating network effects, the chicken-or-egg problem for innovation platforms comes down to two questions: How can a platform owner make it attractive for potential customers to buy the platform even if there are few complementary applications? And how can a platform owner persuade complementors to invest in platform-specific innovations if there is uncertainty about the number of end users who are willing to buy the platform (and the complements)?
The general principle of “Get the engine running and build up some momentum” in order to launch applies to all platforms. What is unique about how complementors engage with innovation platforms is that complementors are not only adopting a platform: They also are acting as technology suppliers and innovators in their own right. When facing a decision to adopt an innovation platform and join the ecosystem, complementors must trust someone else’s technology (the platform) to develop their own new product or service. At the same time, the owner of the innovation platform must entice complementors to innovate on the platform so that the platform becomes increasingly useful and valuable.
Innovation platforms can solve this chicken-or- egg problem by developing or buying some of their own complements. They can also provide free or inexpensive tools and technological assistance to help accelerate third-party innovations. Apple, for example, launched the iPhone and the iPad with a few bundled applications that it developed in-house, including a web browser (Safari), Mail, Photos, Video, iTunes, Notes, Contacts, and Calendar. It also obtained a few other apps from key external content providers, such as Google Maps and the New York Times, ensuring the provision of early complements.
By maintaining secrecy prior to launch and then staging mega-media events, Steve Jobs sought to stimulate maximum exposure for new products such as the iPhone and the iPad. This marketing strategy attracted interest not only from users, which constituted one side, but also from content providers and app developers, which constituted the other side.
Transaction platforms
For most transaction platforms, solutions to the chicken-or- egg problem should be relatively straightforward: How can platform owners make certain there are enough buyers to attract sellers? And how can the platform deliver enough sellers to attract buyers?
When Brian Chesky and Joe Gebbia launched Airbnb in 2007, they decided that the first platform side to build up should be property owners with places to rent; in other words, build up the supply side. Their first challenge was to identify these property owners and rally them in large enough numbers to attract renters. Chesky and Gebbia had the clever idea to avoid starting from scratch, and instead used readily available information on property owners who wanted to rent out their properties. Where could they find this kind of information? A large number of owners had already posted their properties on a popular online classified website, Craigslist. Airbnb founders developed a piece of software that hacked Craigslist to extract the contact information. They also took advantage of newspaper ads and other public postings.
Identifying members for their first side was just the beginning. The founders then had to encourage the property owners to post their listings on the new platform. Airbnb’s value proposition was clear: While requiring no further investment from them, posting their property on Airbnb (in addition to Craigslist) would simply increase the quantity of the property owners’ exposure to possible renters. In addition to increased exposure, Airbnb also helped the property owners increase the quality of their exposure by hiring professional photographers to take photos similar to what a person would see for hotel listings. This decision was not only a differentiating factor from Craigslist-type postings or newspaper advertisements; it also increased the renters’ perception of the value they would get from the Airbnb platform. Renters began to see that they were getting hospitality services comparable to hotels, and usually for a significantly reduced price or in more convenient locations.
The way Airbnb attracted early members was ingenious and added value for both market sides, but this strategy also differed from how Airbnb expanded. For Airbnb to send photographers to each new member’s residence was not easily scalable and financially unsustainable. More important, it was not necessary to continue subsidizing professional photo shoots. By initially subsidizing professional photos, Airbnb set a high bar for the quality of property photography on the Airbnb website. This practice soon became the new norm: Property renters would invest on their own in professional photography to differentiate themselves from other renters. In effect, Airbnb initially incurred a cost that raised expectations within the ecosystem and later simply took advantage of competition among the property owners.
There are three lessons we can learn from Airbnb. First, for many transaction platforms, there may be no need to start from scratch. Instead, platforms should try to make use of existing groups and information, such as by aggregating and analyzing publicly available data. Second, once the platform identifies its different sides, it can offer a service that helps attract members to the platform. And third, platforms may contradict the conventional wisdom for new ventures that says, “Start as you mean to go on.” The launch phase can benefit from actions that just aim at getting started—even if they are not financially sustainable or practically scalable. In short, it is fine to start off in a direction that the platform cannot follow in the long term if it can ignite self-sustaining feedback loops along the way.
In order to launch, transaction platforms usually solve their chicken-or-egg problems in one of two ways: (1) Pick one side and build it up, and then, once that side is sufficiently populated, bring on another side; or (2) bring on both sides at once, little by little, in a zigzag fashion.
Excerpted from The Business of Platforms by Michael A. Cusumano, Annabelle Gawer, and David B. Yoffie. Copyright 2019 by Michael A. Cusumano, Annabelle Gawer, and David B. Yoffie. Published with permission from HarperBusiness and HarperCollins Publishers.