With reward comes risk
For one, platform-based businesses are facing regulatory headwinds in many markets around the world. Regulators are taking a long, hard look at the economic and social costs of having platforms at scale.
The issue is that the line between achieving minimum scale to be self-sustaining and a winner-take-all business can be very fine. Platforms have been called out for pricing out, locking out, and buying out would-be competitors. There have already been several massive fines imposed for anti-competitive behaviour (in the EU, Google has been hit by nearly $10 billion in fines) and regulatory scrutiny is intensifying worldwide.
Recent legislation in India, for example, restricts companies from selling their own products through marketplaces that they own. To comply, Amazon has had to pare back sales of its Echo speakers and Amazon Basics range. Similarly, cities around the world have created new requirements and challenges to slow the spread of services like Airbnb. In Europe and elsewhere, data privacy legislation such as GDPR is challenging the lack of transparency and effective governance over how platforms collect and use data, as well as what kind of data they ought to allow.
How regulation and enforcement will play out is still to be determined. There are calls for some platforms to be broken up. But it is clear that the risks to these business models are real and likely to grow.
As with ecosystems, platform strategy is new and most leaders are not yet equipped to tackle the big questions of whether to build a platform or not, how to build one, and how to become such a company.4 Effective strategies will need to address some big shifts, such as those from:
- Closed to open
This includes thinking about how to create the technical architecture to support connections and interactions between a huge number of users, the policies needed to move risk intelligently around an ecosystem and how to develop the strategies and tactics needed to attract and incentivise users to create value for others. But beyond the mechanics of being open, this shift cuts to the core of how leaders think about competition, cooperation and the borders of the firm.
- Product to community
Traditional firms are organised and work to optimise internal resources in product production and distribution. Platforms must work to optimise external resources in order to facilitate value creation outside of the firm and deliver a holistic user experience. Beyond different operating models, this is a profound shift of organisational competencies and the way that firms think about assets and how to account for them.
- Linear to exponential
The forces of digitisation, computation, connectivity, and communication that are enabling platform businesses are advancing at an exponential rate. Yet most leaders’ mindsets and decision-making are tuned to a history of linear progress. Their strategies and planning competencies employ backward-looking analysis. In the long term, they routinely overestimate the value of their current competencies and assets while underestimating the disruptive potential of technologies and businesses built to take advantage of them.
As with ecosystems, platform business models are going to become more common, not less. Leaders need to develop the tools to contend with them, whether they intend to compete, cooperate or build one of their own.
- Source: https://www.inc.com/business-insider/amazon-google-most-valuable-brands-brand-finance-2018.html
- We might think of pure platforms as those that truly don’t own the assets that they leverage. Tom Goodwin’s famous observation that Uber is the world’s largest taxi company yet owns no vehicles highlights this idea. In many other platforms, companies actually operate a ‘hybrid’ model; integrating their own products into the marketplace that they operate (such as Amazon) or by integrating the marketplace into their product universe (such as Apple).
- This argument has been well evidenced by Ray Sten and cited many times as he explains how, in direct network effects, the cost of connecting users increases linearly but value to all users increases geometrically. In multi-sided markets, different growth rates in cost create a much greater degree of complexity. These platforms often have to subsidise one side of the market in order to catalyse growth of the other. Some companies have managed this after years of spending money to acquire share (network capital). Uber, by contrast, seems to be stuck in subsidising both sides of the market as it fights off competitors in many markets.
- Not every industry is ripe for platform disruption. Van Alstyne, Parker, et al have identified four characteristics of industries that distinguish the susceptible from the protected.