platforms, where the digital economy stands up

Platforms Where the digital economy stands up

EIT Digital Master School Data Science Master DegreeCreation and deployment of digital servicesJune 2-3 2016

Francisco Jariego@fjjariego

Platforms are the future—but not for everyone

http://www.economist.com/news/business/21699103-platforms-are-futurebut-not-everyone-emporium-strikes-back

Platforms have allowed American companies to build global digital emporiums that have come to dominate the technology industry.

— The Economist, May 2016

Where Uber and Amazon rule: welcome to the world of

the platform

https://www.theguardian.com/technology/2015/jun/07/facebook-uber-amazon-platform-economy

Some prominent critics even speak of “platform capitalism” – a broader transformation of how goods and services are produced, shared and delivered (…) the emergence of a new, seemingly flatter and more participatory model, whereby customers engage directly with each other. With a smartphone in their pocket, individuals can suddenly do things that previously required an array of institutions.

— The Guardian, June 2015

Platform Thinking

Platforms like YouTube and Twitter have different roles, rules, strategies, and business models than typical companies. They create completely new markets, are highly disruptive to existing ways of operating, and are, by their very nature, suitable for scaling. Understanding platform thinking is a must for entrepreneurs and businesses, especially for social entrepreneurs who want to scale their impact without making large investments.

— Sangeet Choudary

http://www.thnk.org/insights/crash-course-platform-thinking/

Data as a platform

Mary Meeker, Internet Trends 2016

Are unicorns all platforms?

Unicorns are private startup companies that have achieved a valuation of (more than) $1billion before IPO

A review of the 115 companies listed as Unicorns by CB Insights in June 2015 found that 80 of these companies —70%— are platform companies.

http://graphics.wsj.com/billion-dollar-club/

Uber

$62.5BXiaomi

$46.0BAirBnB

$25.5B

Spotify

$8.5B

Peter C. Evans and Annabelle Gawer, “The Rise of the Platform Enterprise: A Global Survey”, January 2016

Platform companies by region


Top 10 cities by platform headquarters


Top 10 sector rank

Number of Companies

Market Capitalization

Increasing productivity through efficient matching Improving asset utilization, the sharing economy Accelerating innovation Attracting investment from VC’s Making deep inroads into other industries… from TV to transportation, and more coming…

Raising regulatory controversy: Market dominance Tax avoidance Relation to labour markets: workers vs. contractors

Platform have a real tangible economic impact today


The “product” business model is broken

• A product is good, idea, method, information, object or service that serves a need or satisfies a want.

• After buying it, you have some exclusive ownership or access.

• iPhones and GoPros, Microsoft Office and Adobe Photoshop, Candy Crush and The New York Times mobile app are products.

• You might pay a flat price, a SaaS fee, trade your attention for ads, get some amount of free usage or partake in in-app purchases, but the concept is the same. You buy or sign up for something and use it.

• The distinguishing aspect of a platform is the ability for others to build products and ultimately generate revenue on top of it, often in ways the platform creator never imagined.

• Platforms generate revenue by taking a cut of proceeds, and costs tend to scale in proportion to their use.

• Amazon Web Services, iOS and Android, American Express, Sony PlayStation, eBay, Facebook, Skype, Vogue magazine, Yellow Pages, YouTube, Uber, AirBnB are platforms

• Traditional cable TV companies, department stores, movie theatres, satellite radio companies, aren’t

Product versus Platform

http://techcrunch.com/2015/11/28/the-platform-paradox

Platforms are not new…

I don’t want to belong to any club that will accept people like me as a member

— Groucho Marx

Clubs

Newspapers

Credit Cards

Cities

Industry Platform Side 1 Side 2

Media

Newspapers & Magazines Reader Advertiser

TV Network Viewer Advertiser

Web Portal Web "Surfer" Advertiser

SoftwareOperating System App. User Developer

Video Game Console Game User Developer

Payments Credit Card Cardholder Merchant

Transport Ride-Hailing Passenger Driver

Retail Amazon, Ebay, Alibaba Buyer Merchant

Why does a platform exist?

Why does a platform exist?

The fundamental goal of a platform is to enable interactions between producer and consumer, allowing them to share or exchange things without direct intervention by the platform owner

Producers can ‘plug-in’ and create on top of a platform. The consumer is often also a producer!

EU Commission: Online platform refers to an undertaking operating in two (or multi)-sided markets, which uses the internet to enable interactions between two or more distinct but interdependent groups of users so as to generate value for at least one of the groups. Certain platforms also qualify as intermediary service providers.

Annabelle Gawer: technological building blocks (which can be technologies, products, or services) that act as a foundation on top of which an array of firms, organized in a set of interdependent firms (‘‘ecosystems”) develop a set of inter-related products, technologies and services

Sangeet Choudary: A platform is a plug & play business model that allows multiple participants (producers and consumers) to connect to it, interact with each other and create and exchange value

Michael Cusumano: A platform or complement strategy differs from a product strategy in that it requires an external ecosystem to generate complementary product or service innovations and build positive feedback between the complements and the platform. The effect is much greater potential for innovation and growth than a single product-oriented firm can generate alone.

What is a Platform?

What is a Platform?

A Multi-sided platform (MSP) is an organization that creates value primarily by enabling direct interactionsbetween two (or more) distinct types of affiliatedcustomers

— Hagiou & Wright 2011

Re-SellerSide A Side B

MSP

Side A Side B

From Pipes to Platforms

Sale of goods or services

Sale of goods or services

Affiliation Affiliation

Direct Interaction

“A product is useless without a platform, or more precisely and accurately, a platform-less product will always be replaced by an equivalent platform-ised product”

— Jeff Bezos

“A platform is a system that can be adapted to countless needs and niches that the platform’s original developers could not possibly have contemplated…”

— Marc Andreessen

Platforms: market or technology?

The economic perspective: Platforms create value by acting as conduits between two or more groups of consumers who would not have been able to connect or transact without the platform. Platforms are two-sided or multi-sided markets

The engineering view: Platforms have a modular type of technological architecture, with interfaces (API) being fundamental for modularity to facilitate innovation. Platforms are purposefully designed technological architectures that facilitate innovation

The Platform Stack

Network / Ecosystem

Technology Infrastructure

Data

https://medium.com/art-marketing/the-platform-stack-c83f9c96e6#.a6dsfuz9x

2-sided markets

1. .Two or more different groups of customers who need each other in some way

2. Crossed network externalities between these groups (a group being attracted to the platform because of the other group's participation)

3. An intermediary (platform) facilitates the coordination more efficiently than bi-lateral relationships, minimizing transactions costs, and (partially) internalizing the externalities between groups

The interesting question is often not whether a market can be defined as two-sided—virtually all markets might be two-sided to some extent—but how important two-sided issues are in determining outcomes of interest!

Positive network effects are present when the value of a product or service increases with the increasing number of other users

Direct positive network effects apply to the same group of users (e.g. more users joining a telephone network, or a social network like Facebook). For users of those platforms, the value of using the platform grows as other participants with whom they can interact start joining.

Indirect positive network effects exist when users of one group benefit from an increased presence of users from a different group (e.g. sellers on an online marketplace benefit from a higher number of buyers).

Network effects and externalities: Bigger is Better

A customer on one side of the market will be willing to affiliate with a platform only if he or she expects enough participation from the other side.

Today’s expectations regarding the growth of a network will be an important determinant of their adoption decision

Failure to achieve “critical mass” quickly results in the implosion of the platform. Most platforms fail to take off.

Expectations: The Chicken & Egg Conundrum

The aura of inevitability is a powerful weapon when

demand-side economies of scale are strong

Time

Users

Launch

Take-off

SaturationPositive feed-back

Critical Mass

Example: Network Effects, Uber

Rochet & Tirole, “Platform competition in two-sided markets”

A firm can rationally invest in a product it intends to give away into perpetuity even in the absence of competitors.

Increased demand in a complementary premium goods market may cover the cost of investment in the free-goods market.

This strategy also takes advantage of information’s near zero marginal costproperty as it allows a firm to subsidize an arbitrarily large market at a modest fixed cost.

If you are not paying for it, you are the product!

Platforms are competing in “winner takes all” or “a few winners take all” markets:

Switching costs and lock-in. Tipping & winner takes all markets

(monopoly) Components, complements, systems Coordination & Standards Open strategies Technology adoption with multiple

equilibria …

Network Economics

Time

Marketshare (%)

100

50

0

Battlefield

Supply-side and demand-side economies of scale

combine to make positive feedback in the digital

economy especially strong

Example: How IOS, Android deliver benefits to all sides

Vision Mobile

Example: Smartphones take over

Profit Share Handsets 2007-2013Share of Shipments 2005-2013

Vision Mobile

Example: Web Browser Adoption 1996-2015

Wikipedia / Reddit

How to build a (digital) platform

It’s nearly impossible for a startup to create a platform from scratch

Most platforms emerge as the byproduct of a successful product solution

Amazon’s AWS, Facebook and iOS entered the platform business somewhat unwittingly.

Unless you’re smarter than Steve Jobs, start by solving a problem for your customer and only become a platform when you’ve become the standard in solving that Problem

How to build a (digital) platform

http://techcrunch.com/2015/11/28/the-platform-paradox

Identify a Problem

Identify the Core

Interaction

Rules and Tools:

Design a way to facilitate and automate the

interaction

Scale Up:build up a

network around the interaction

Every business has a platform angle

Every business today is faced with the fundamental question that underlies Platform Thinking: How do I enable others to create value?

Entrepreneurs who start multi-sided platforms must secure enough customers on both sides

Failure to achieve “critical mass” quickly results in the implosion of the platform.

There are a number of strategies available to entrepreneurs to reach critical mass.

For example, the “zigzag” strategy involves successive accretions of customers on both sides to build up the value to both.

The relevant strategies depend on the nature of the platform:

It requires securing participation by both platform sides at launch (e.g. dating venues)

it is possible to acquire one side before approaching the other side (e.g. search engines)

it is necessary to make pre-commitments to one side to induce them to make investments (e.g. video games)

Evans: How Catalysts Ignite: The Economics of Platform-Based Start-Ups

Getting both sides of the market on board

Why did Linkedin beat Monster?

What’s so special about Medium?

How did AirBnB disrupt Craiglist?

Why do YouTube and Vimeo coexist?

Sangeet Paul Choudary, The Platform Stack

1. All teams will expose their data…2. Teams must communicate through

interfaces3. … no other form of inter-process

communication allowed4. Interfaces, without exception, must be

externalizable5. Anyone who doesn’t do this will be fired

Eat your own dog-food

What comes next?

We want more jobs!

What comes next?

Retail & Social

Networks

Sharing Economy

Cyber physical

the transformation of everything else…

Smart Cities

Industry 4.0

…

The EU way: Loyauté des plateformes

DIGITAL SINGLE MARKET

INNOVATION & ENTREPRENEURSHIP

Is Europe putting regulation above

innovation, and being too protectionist?

Platforms Here be dragons

Francisco Jariego @fjjariego

Eisenmann, T. R., Parker, G., & Van Alstyne, M. W. (2008). Opening Platforms: How, When and Why? SSRN Electronic Journal. http://doi.org/10.2139/ssrn.1264012

Evans, David. S. (2011). “Platform economics: Essays on multi-sided businesses.”

Peter C. Evans and Annabelle Gawer (2016)“The Rise of the Platform Enterprise: A Global Survey”

Hagiu, A., & Wright, J. (2015). Multi-sided platforms. International Journal of Industrial Organization, 43, 162–174. http://doi.org/10.1016/j.ijindorg.2015.03.003

Rochet, J.-C., & Tirole, J. (2003). Platform Competition in Two-Sided Markets. IDEI Working Papers.

Rochet, J.-C., & Tirole, J. (2004). Two-sided markets: An overview.

Rochet, J.-C., & Tirole, J. (2005). Two-Sided Markets : A Progress Report. IDEI Working Papers.

Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions - Online Platforms and the Digital Single Market Opportunities and Challenges for Europe (COM(2016)288) May 2016

Commission Staff Working Document on Online Platforms, accompanying the document "Communication on Online Platforms and the Digital Single Market" (COM(2016) 288) May 2016

Shapiro, Carl, and Hal R. Varian. Information Rules: A Strategic Guide to the Network Economy. Boston, Mass: Harvard Business Review Press, 1998.

Shy, Oz. The Economics of Network Industries. Cambridge, U.K. New York: Cambridge University Press, 2001.

References

http://doi.org/10.2139/ssrn.1264012

platforms, where the digital economy stands up

Economy & Finance