Business of Platforms

Books · Startups

(Read this in February 2019, adding to Notion in Feb 2021)

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The Business of Platforms

Previous work summary + new concepts

In platform leadership, 4 key levers were identified:

  1. How to balance the encouragement of third-party firms to innovate around the platform, vs the decision to build your own complements. (Example—Microsoft built both Windows the platform and Office the essential complement)
  2. How to design a platform that is both accessible and modular, so that external firms can more easily build their own complementary innovations
  3. Initiatives that help ecosystem companies innovate around the platform. Credits, enabling tools, developer forums, targeted venture funds
  4. How can platform leaders organise internally to maintain some semblance of neutrality as they compete with their complementors and need third-party firms to trust them

2 new concepts:

  1. Coring — how firms can become platform leaders in markets that have not yet introduced a platform. Identify an industry-wide problem, and then introduce a product, technology, or service as a core, essential solution. The idea is to retain control of the technology and monetisation opportunities, but offer easy access to third parties. Cheap/free licensing, modular design (so other firms can connect to and build on top of the solution). Successful coring examples are Google’s free search toolbar
  2. Tipping — set of strategies to compete in markets with multiple platform contenders, but none with a dominant position. Subsidise key sides of the market. Examples — Google bringing together multiple phone manufacturers to create an Android alliance against the smartphone and giving away android for free

Platform thinking

Bill Gates gave away MS-DOS for free to his main customer (IBM). Strategy was to make the operating system into an industry-wide platform. Gave away SDK for free to encourage other companies to develop on his platform. Microsoft was thinking platform. Apple and IBM were thinking products.

Software applications on platforms a much bigger business than B2B Sales. Success depends more on complimentary applications that determine what the customer can do with the product

Bring multiple sides of the emerging market together, and generate positive feedback loops. Platform success depends on ability of leaders’ to inspire complementary innovations from third party actors

Platforms connect individuals or organisations for a common purpose or common source.

2 kinds of platforms:

Innovation platforms: Common technological building blocks that platform owner and innovation partners can share in order to create complimentary products or services (apps/digital content)

Transaction platforms: Intermediaries (marketplaces) that make it possible for people/organization to connect with each other and buy+sell

Winners Take All or Most

Network effects — one sided (telephone), two sided (users+advertisers), multi sided (users+advertisers+Developers)

We-chat evolved from a one-sided messaging platform to a transaction platform to create multi-sided platform effects

Multihoming — Are your users also using competing services? Doing so reduces the value of your network effects. For instance, when video game consoles lowered their prices to try and build network effects, it led to multihoming as users bought multiple consoles and multi-homed

Differentiation and niches: Fragmented market with niche players reduces network effects and the likelihood of a winner-takes-all outcome

Barriers to entry and switching: If switching costs are low and entry is easy, then the market is unlikely to be highly profitable. Low barriers to entry encourage competition, which generally leads to lower prices and lower profits for everyone

Strategy And Business Models

4 steps to building a platform

  1. Choose sides of the platform
  2. Launch
  3. Design your business model
  4. Establish and enforce ecosystem rules

Innovation — if value comes from enabling third parties to build their own products or services, do this

Key for this is to identify complementors who will increase demand for platform by creating new stuff

You can also launch complements yourself — specially to stimulate demand for early versions of your platform

Transaction — if value comes from allowing different sides of a market to interact, do this

Add different sides gradually (not all at once — cold start problem)

5 ways of monetising

  1. Matchmaking
  2. Reducing friction between transactions
  3. Complementary services
  4. Complementary technology sales
  5. Advertising

Both — need to ensure quality of complements and of network

Common Mistakes

  • Spending too much on unsustainable business models (growing too fast)
  • Not spending enough time and energy on marketing and business model innovation
  • Losing user trust in the quest for growth
  • Network effects don’t guarantee success forever — you can fail to move before the market flips