Platform Technologies and Marketplaces
CHAPTER SUMMARY: This chapter covers how the new digital-business models that have led to rapid growth and profits by the large technology companies arise from new technologies. Platform technologies tend to share certain dynamics, including network effects, efficient distribution, and asymmetric growth.
The transformation of “Don’t Buy This Jacket” into a full-blown business line selling repurposed and restored wares has the potential to markedly increase the value that Patagonia obtains through every sale item. Unlocking this profit engine demonstrates the potential of two of the new business models that the exponentially advancing technologies have facilitated: marketplaces and platforms.
Marketplaces have existed since time immemorial as places where people gather for commerce. From Istanbul’s Grand Bazaar to Oxford Street in London and the shopping malls that dot the suburbs of the United States, marketplaces are omnipresent. Virtual marketplaces, however, are both more accessible and more profitable than physical ones, because they are not constrained by physical real estate or brochure page count. Indeed, Amazon’s entire conceit is to create an “endless shelf” that easily bears the weight of hundreds of millions of products, far more than any brick-and-mortar store could ever handle. The Internet and ubiquitous connectivity make establishment of a marketplace easy: eBay, Amazon, PayPal, and many others succeeded as a result of the ease of building them.
From Marketplaces to Platforms That Support Entire Ecosystems
In a variation on marketplaces, platform businesses have emerged as the most powerful forces in global business. Platforms allow others to build businesses on top of them. By creating a new source of value with innovative products and capabilities, platforms allow many others to benefit, increasing every vendor’s profit. Most of the blockbuster technology successes of the late 1990s and early 2000s have been platform technologies. Salesforce, Facebook, Google, Microsoft, and Amazon are all classic examples. As of this writing, the five most valuable publicly traded companies in the world—Apple, Google, Microsoft, Amazon, and Facebook—are all platform companies, and collectively worth more than $3 trillion. The seventh- and eighth-most valuable are Chinese platform companies Alibaba and Tencent. The ninth-most valuable company, Visa, is a platform company as well.
Across public and private markets, KPMG calculated that, as of 2018, the world’s top 242 platform companies had a collective market value exceeding $7 trillion, 187 of them being worth more than $1 billion each.1 One of these, Amazon Web Services (a unit inside Amazon), would probably be among the top 15 most valuable companies in the world if it were an independent company, and Google’s YouTube and Apple’s App Store would probably be in the Fortune 100.
Transaction Platforms, Innovation Platforms, Combined Platforms
For the most part, platforms are online matchmakers or technology frameworks. The most common types are transaction platforms, which bring together buyers and sellers and provide tools for their efficient use by either side; examples are eBay and Airbnb.
Apple, for example, hosts an App Store where developers can sell software products (games, applications) and publishers can sell content (music, movies, books, magazines). Apple also provides the software frameworks necessary for third parties to build applications on the Apple platform.
Other transaction platforms include Amazon, Airbnb, Uber, and Baidu.
A second platform type, the innovation platform, provides a common technology framework for businesses to build upon, and benefits both the platform provider and those who build on it or use it. For example, Salesforce is an innovation platform in that it supports thousands of independent companies that develop and sell their own software products based on the Force.com framework.
The most powerful platform companies tend to be both transaction and innovation platforms: combined platforms. Facebook is one such: it is both a marketplace where people can buy casual games and ads, and a place where developers can create and sell games and monetize content, using Facebook’s technology.
Platform businesses are found on every populated continent. The M-Pesa mobile-payments platform, in Africa, is believed to be the first broadly accepted platform for mobile payments, before WePay and Alipay in China.
Platforms can be built on software-controlled physical devices too. Tesla’s cars; DJI’s drones; and Apple’s, Amazon’s, and Google’s voice assistants are all platforms comprising physical devices and software. The applications that developers build on top of Android and iPhone make obvious examples, but many entrepreneurs are using DJI’s open application programming interfaces (A.P.I.s) and developer platform to build products on top of DJI’s drone to add capabilities and value beyond the basic DJI offering of a flying smartphone. And we may regard Tesla as a software platform attached to a battery and a chassis. While Tesla has not yet opened up its A.P.I., hobbyists have reverse-engineered it, and there is a thriving exchange of modifications. Furthermore, in company with other vehicle manufacturers, Tesla now enjoys numerous aftermarket products made to improve the car in various ways.
Platforms can also be built upon successful applications. Uber is seeking to diversify its revenue stream by basing food delivery and transportation logistics on its very popular ride-hailing app. Google Maps has a fast-growing business selling access to its geospatial information and constant updates to application companies that require maps and other related data.
Other Common Platform Characteristics
For the most part, the key element common to innovation platforms is software, which makes possible the platforms that incorporate the speed and reach they display today. Platform businesses also tend to share three further key characteristics: network effects, distribution power, and asymmetric growth.
Network Effects: The More, the Merrier
Platform businesses enjoy network effects, meaning that every additional user of a platform makes the platform more interesting to sellers and more valuable to both. The higher the number of connected users and of products, services, or pieces of information on a platform, the more valuable it becomes, and the harder to dislodge. Technologies, too, undergo this effect, as the fax machine, the smartphone, and online multiplayer games illustrate. The most valuable platforms tend to have strong network effects. The LinkedIn social network for business, as well as the German competitor XING, become far stronger and more valuable as more people participate in it.
Distribution Power: Lots of Money Goes to Others
Platform business models expand rapidly by enabling other businesses to profit by them. In addition, platform businesses tend to be particularly helpful for so-called long tail transactions and businesses, wherein volume and demand may both be limited. This enables significantly more participants to benefit from them. So, for example, eBay can equally well support someone who sells only a handful of items each month and a large retailer that treats eBay as another full-blown digital sales channel.
Asymmetric Growth and Competition: Giving It Away
Large platform businesses commonly attract customers by giving away a significant subset of some service, either by monetizing the service indirectly with ads or by selling user data. Google and Facebook famously pioneered this using search and social networks respectively, but many platform businesses do it. Apple, for example, enables free distribution of many types of content and many device functions. By giving away something first or foremost, platform companies can rapidly build a customer base large enough to successfully market their commercial products.
Every Company Wants to Be a Platform Company
Though companies with many elements of platform businesses have existed for thousands of years, the phrase platform business became more widespread in the early 2000s. Since then, venture capitalists have become infatuated with the model. They love it because it is highly capital efficient and has very low requirements for capital expenditures or purchases of physical goods. Platforms thrive on so-called intangible investments. CEOs love it, too. In survey after survey, senior leaders in numerous industries have expressed a strong desire to develop a platform component in their businesses.
Patagonia used all these advantages to expand from a one-way retail outlet into a marketplace—more fully owning its relationship with customers. In fact, Patagonia is itself using a platform company, Trove (formerly Yerdle), to support its online reselling. Nested platforms are common.
Many industries have had vertically integrated marketplaces for some time. Apple, for instance, has long accepted trade-ins and sold reconditioned items, and car dealerships have, since time immemorial, purchased and resold used cars as incentive to upgrade to newer vehicles.
But key changes have made marketplaces easier to create and to modernize. Today, everyone who opens a smartphone is shopping. Search engines have made it far easier for shoppers to find marketplaces and for marketplaces to advertise to the right shoppers—particularly to those who already show shopping intent, as is the genius of Google’s powerful AdWords technologies. This greatly facilitates finding and recruiting potential users of products at the prototype stage, when designers and engineers need to test their products.
Marketplaces and Platforms Are at the Center of Many Innovation Breakthroughs
These interlocking models—marketplaces and platforms—exemplify the many uses of newer technologies in creating businesses that grow more lucrative over time by serving as bases for other businesses. Of course, some of the most innovative businesses are not marketplaces: SpaceX and Dollar Shave Club are not. But all are adopting marketplace characteristics. SpaceX, for instance, is looking to pursue an auction for freight space on its launches; Dollar Shave Club is including additional products and promotions in its boxes. Tesla is expanding beyond cars into other items and has plans to make entertainment offerings via its car systems. Almost any popular business can take on elements of a platform and a marketplace if it determines what parts of its business can be shared, resold, repurposed, or built onto.
Innovative Companies Work Hard on Platform Design
The smartest businesses treat the embrace of platforms as a key to their success rather than as happenstance. Legacy organizations such as farm-equipment maker John Deere and industrial conglomerate General Electric are dabbling in marketplace and platform business models with a view to unlocking new and additional revenues, and they embrace wholeheartedly the new opportunities that exponential technologies create. Moreover, they are willing to recognize that perhaps they do not know what the next great business model will be.
Programming Amazon to Be a Platform-Making Company
This is, in part, why Amazon has famously enforced its A.P.I. manifesto: all internal businesses shall build software routines, protocols, and tools that all users can access and use to build their own businesses on top of or alongside. This is the genius of Amazon Web Services, which began as an internal I.T. project and has since become Jeff Bezos’s most prolific profit center. This will be particularly critical as A.I. and quantum computing reduce the cost of many fields of information processing, making their application newly affordable to various problems and services.
The power of platforms is very well explained in a book, Platform Revolution: How Networked Markets Are Transforming the Economy and How to Make Them Work for You, by Geoffrey Parker, Marshall Van Alstyne, and Sangeet Choudary, who show how platform businesses bring together producers and consumers in high-value exchanges in which the chief assets are information and interactions.2 These interactions are the creators of value, the sources of competitive advantage. It is the interactions that give Silicon Valley advantages over competitors in every industry.
Platforms are ushering in a new business environment, in which a handful of powerful businesses are becoming more dominant than ever. They are also becoming more vulnerable, though, to changing sentiments, customer tastes, and technological obsolescence, and the ability to create platform models and related innovations relies heavily on a workplace culture to foster it—which we’ll explore further in the next chapter.