Much has changed in the past two years since MIT IDE presented its first Platform Strategies Summit. The idea of interconnected, information-driven networks creating value through open partnerships is no longer a radical vision; it’s becoming mainstream.


Even a few years ago, the notion put forth by John Reynolds, Managing Director, Agile Fractal Grid Inc., may have been futuristic thinking.  At the July 15 MIT Platform Strategy Summit hosted by the  MIT Initiative on the Digital Economy, however, he described a “platform-of-platforms”/ digital marketplace for operational, analytical and financial applications to be used by members of the National Rural Electric Cooperative Association and their tenants. Reynolds explained details of a planned, shared-infrastructure partnership with 960 rural electric cooperatives that will cover over 75% of the country for decentralized power, communications and computing.


The program will offer services from 2.5 million electrical transformers that are “fundamental to the Network-as-a-Service” concept that the Fractal Grid will provide. The planned services will include: E-Commerce products; software-as-a-service; free mobile apps; media hosting; user-generated content and two-sided marketplaces.


Re-shaping Traditional Industries

Clearly, platform business models are rapidly reshaping the structures and conditions of industries from media, energy and telecommunications, to academia, gaming and retail. While upstart businesses—such as Uber, Airbnb and others -- are forging ahead with new business models, traditional industries and organizations also realize that they need to address the challenges and behavior of platform-based markets in any way they can.


Simon Torrence, (pictured below, left) an advisor at Bearing Point, noted that, “Most incumbent enterprises are fundamentally ‘linear’ and pipe-centric” making platforms very new and potentially scary for them. But if platform is the winning business model in the digital economy, he said, “Digital ecosystem management must be the new enterprise discipline” for reaping new opportunities.

_DSC0826bearing point2.jpg

Nevertheless, Torrence acknowledged that expertise in ecosystem design/management, software engineering and data science is hard to find. Moreover, there are significant organizational barriers that he said require ‘Ninja IT’ and ‘Lean Start Up’ methods to quickly demonstrate value.


Emphasis has shifted to recruiting talent to develop platforms and to work in these new environments, according to Janel Garvin, CEO of Evans Data Corp., and for those who can adjust existing strategies to accommodate the new models.


MIT IDE experts have forecasted the rapid ascent of platforms for some time. As MIT Research Fellow, Geoff Parker (pictured below, right), and Boston University’s Marshall VanAlstyne, wrote recently:  “Platforms typically employ just a tiny fraction of the people the incumbents employ. Ecosystem partners provide labor and capacity. By contrast, a pipeline business employs a step-by-step arrangement for creating and transferring value, with producers at one end and consumers at the other as in a traditional linear value chain.”


In a recent Harvard Business Review article, they noted that “platform businesses bring together producers and consumers in high-value exchanges. Their chief assets are information and interactions, which together are also the source of the value they create and their competitive advantage.”_DSC0253 (2).jpg


Global Platform Acceptance

This year’s Summit speakers emphasized how widespread and global platform acceptance has become. Keynote speaker, Samuel Palmisano, Chairman of the Center for Global Enterprise, said the companies achieving the largest scale today possess few assets but build an extensible platform ecosystem. “These companies have tremendous leverage and return on capital,” he said.


According to a recent global survey of platform enterprises by the Center, the largest platform companies today –Amazon, Facebook, Google--are typically young, public and American. But that is changing. China is the second-largest platform market, in part, because it has barriers of entry for American firms.


Asia and Africa are poised for rapid growth, according to the Center’s VP,  Peter Evans, while Europe’s strict regulations have led to a paucity of homegrown platforms. Regardless of geography, he said, “If you’re not on the platform wave, you’ll be in trouble, long-term.”

Recently, I wrote about one of the talks at the annual conference of the MIT Initiative on the Digital Economy - Only Humans Need Apply by Tom Davenport, based on his recently published book of the same title.  I would now like to discuss another excellent talk at the same conference - How Platforms Change Strategy by Boston University professor Marshall Van Alstyne, also based on a recently published book,Platform Revolution: How Networked Markets are Transforming the Economy and How to Make Them Work for You, co-authored with Geoffrey Parker and Sanjeet Choudary. The three also published a related article in the April issue of the Harvard Business Review.platform-revolution.jpg


Van Alstyne started out his presentation by noting that back in 2007, seven firms controlled 99% of handset profits: Nokia, Samsung, Ericsson, Motorola, LG, RIM and HTC. That same year, Apple’s iPhone was born and began gobbling up market share. By 2015, only one of the former incumbents had any profit at all, while Apple now generated 92% of the industry’s global profits.


What happened? “Is it likely all seven incumbents had failed strategies, run by clueless management, lacking execution capabilities?,” he asked. “Or was something more fundamental happening?… Nokia and the others had classic strategic advantages that should have protected them: strong product differentiation, trusted brands, leading operating systems, excellent logistics, protective regulation, huge R&D budgets, and massive scale. For the most part, those firms looked stable, profitable, and well entrenched.” How can we explain their rapid free fall?


Information and Interactions: Value Creators

We all know the answer to Van Alstyne’s rhetorical questions: “Apple (along with Google’s competing Android system) overran the incumbents by exploiting the power of platforms and leveraging the new rules of strategy they give rise to. Platform businesses bring together producers and consumers in high-value exchanges. Their chief assets are information and interactions, which together are also the source of value they create and their competitive advantage.”


For the past two centuries, the industrial economy has been driven by supply-side economies of scale. Because of the massive fixed costs of physical assets, firms achieving higher volumes have a lower cost of doing business, which allows them to reduce costs and further increase volumes. Market power is thus achieved by controlling resources, increasing efficiency and fending off competition. “The goal of strategy in this world is to build a moat around the business that protects it from competition and channels competition toward other firms,” notes the HBR article.


In the digital economy, on the other hand, the driving force is demand-side economies of scale. That’s what network effects are all about. Scale is what increases a platform’s value. The more products or services a platform offers, the more users it will attract, helping it then attract more offerings, which in turn brings in more users, which then makes the platform even more valuable. Moreover, the larger the network, the more data is available to customize offerings to user preferences and better match supply and demand, further increasing the platform’s value.platforms2.png


Platforms have long played a key role in the IT industry. IBM’s System 360 family of mainframes, announced in 1964, became the premier platform for commercial computing over the following 25 years by developing a 3rd party ecosystem of add-on hardware, software and service. In the 1980s, the rapid growth of personal computers was largely driven by the emergence of the Wintel platform which attracted a large ecosystem of hardware and software developers. Then in the 1990s, the explosive growth of the Internet drove platforms to a whole new level, connecting large numbers of PC users to a wide variety of web sites and online applications. Platforms have grown even more dramatically over the past decade, with billions of users now connecting via smart mobile devices to all kinds of cloud-based applications and services.


'Frictionless' Participation

IT has been bringing the power of platforms to an increasing number of industries. By reducing their need to own physical assets, “IT makes building and scaling up platforms vastly simpler and cheaper, allows nearly frictionless participation that strengthens network effects, and enhances the ability to capture, analyze, and exchange huge amounts of data that increase the platform’s value to all. You don’t need to look far to see examples of platform businesses, from Uber to Alibaba to Airbnb, whose spectacular growth abruptly upended their industries.”


For almost 20 years now, e-commerce platforms have been giving physical stores and shopping malls a run for their money. More recently, we’ve seen Uber, - with only 5,000 employees and a valuation of $60 billion - and Airbnb - with 3,000 employees and a valuation of $21 billion - disrupt the transportation and hotel industries respectively.

It’s instructive to contrast platform-based strategies with those of more classic product strategies.  In a 2008 HBR article, Harvard professor Michael Porter explained that the key to a successful product strategy is to understand and cope with five key competitive forces:

  • rivalry among existing competitors;
  • threat of potential new entrants;
  • threat from substitute products or services;
  • bargaining power of suppliers; and
  • bargaining power of buyers.


“The extended rivalry that results from all five forces defines an industry’s structure and shapes the nature of competitive interaction within an industry,” wrote Porter. But the nature of competition and strategy is quite different in a platform-based business, said Van Alstyne:


  • The goal is interactions that yield network effects and provide growth and sustainability, - not protecting market niches or erecting industry barriers.
  • Industry boundaries can be altered as appropriate, - rather than sticking to sharply defined categories.
  • Competition is multi-layered, “more like 3D chess”, - rather than just relaying on product differentiation or lower costs.
  • Competitors are turned into complementors that offer their products or services on the platform - there’s no longer a need to own unique, inimitable resources.

In a product-based business, “the five forces are relatively defined and stable.  If you’re a cement manufacturer or an airline, your customers and competitive set are fairly well understood, and the boundaries separating your suppliers, customers, and competitors are reasonably clear.”  But, in a platform business, those boundaries can shift rapidly because of shifting dynamics within the platform ecosystem.The platform participants - consumers, producers, providers - are key to value creation.  “But they may defect if they believe their needs can be met better elsewhere…  every platform must induce producers and consumers to interact and share their ideas and resources.  Effective governance will inspire outsiders to bring valuable intellectual property to the platform…  That won’t happen if prospective partners fear exploitation.”


Three Key Shifts

“With platforms, a critical strategic aim is strong up-front design that will attract the desired participants, enable the right interactions (so-called core interactions), and encourage ever-more powerful network effects… while guarding against threats remains critical, the focus of strategy shifts to eliminating barriers to production and consumption in order to maximize value creation… To that end, platform executives must make smart choices about access (whom to let onto the platform) and governance (or control - what consumers, producers, providers, and even competitors are allowed to do there)…” The transition from a product-oriented strategy to a platform strategy requires three key shifts, note Van Alstyne et al in their HBR article:


  • From resource control to resource orchestration. Don’t try to gain competitive advantage by controlling scarce and/or valuable resources “With platforms, the assets that are hard to copy are the community and the resources its members own and contribute, be they rooms or cars or ideas and information. In other words, the network of producers and consumers is the chief asset.”
  • From internal optimization to external interaction. Don’t attempt to create value by optimizing the entire chain of product and service activities. “Platforms create value by facilitating interactions between external producers and consumers. Because of this external orientation, they often shed even variable costs of production.”
  • From a focus on customer value to a focus on ecosystem value. Don’t seek to maximize the lifetime value of individual customers of products and services. “[P]latforms seek to maximize the total value of an expanding ecosystem in a circular, iterative, feedback-driven process.”


Summing up, the speakers note: “The failure to transition to a new approach explains the precarious situation that traditional businesses -from hotels to health care providers to taxis - find themselves in… the writing is on the wall: Learn the new rules of strategy for a platform world, or begin planning your exit.”


This blog first appeared June 14 here. Watch for more updates from the July 15 Platform Strategies Summit.

By Geoffrey Parker and Marshall VanAlstyne


It’s no overstatement to say that the two-sided networked market, or platform, business and organizational model is one of the most important economic and social developments of our time. Surprisingly, many people—even savvy business executives—remain unaware of how this happened, or what to do about it.


alibaba-logo.pngThe platform model underlies the success of many of today’s biggest, fastest-growing, and most powerfully disruptive companies-- from Google, Amazon, and Alibaba to Uber, Airbnb, and Tencent. Platforms use technology to connect people, organizations and resources in an interactive ecosystem in which enormous value is created and exchanged. And we believe that they are just beginning to transform a range of other economic and social arenas, from health care and education to energy and government.

As recently as 2007, single-product leaders ruled their markets—dictating pricing, marketing strategies and manipulating demand cycles globally. Brands such as GE, Sony, Garmin, Canon, Nokia and Toyota reigned supreme. Amazon.png


In Platform Revolution, our new book co-authored with Sangeet Paul Choudary, we explore the escalation of IT-driven platforms over established product leaders -- such as iPhone’s rapid domination of its industry at the expense of Nokia, Blackberry, Motorola, Sony Ericsson and others. We also advise business and technology leaders on ways to prepare for even more rapidly unfolding disruption.


If it seems like business models are evolving radically, it’s true: Platforms invert companies, transforming firms’ traditional focus on internal value creation to an outward focus on external value creation.

Platform businesses outcompete traditional “pipeline” companies by harnessing resources they do not own and scaling at a pace traditional firms cannot match. Consider that Airbnb owns no real estate and Uber owns no cars yet each has grown faster than Marriott or Yellow Taxi has ever grown, or can hope to grow, using traditional methods of supply.

Platforms typically employ just a tiny fraction of the people the incumbents employ. Ecosystem partners provide labor and capacity. By contrast, a pipeline business employs a step-by-step arrangement for creating and transferring value, with producers at one end and consumers at the other as in a traditional “linear value chain.”


In a recent HBR article, we noted that “platform businesses bring together producers and consumers in high-value exchanges. Their chief assets are information and interactions, which together are also the source of the value they create and their competitive advantage.” Businesses—newcomers as well as traditional firms re-inventing themselves—must understand the new rules and executive must also make smart choices about access and governance.


There will be huge benefits and winner-take-all markets, but there will also be painful transitions, job loss and societal tradeoffs.


Platform Revolution offers a roadmap on how to start and run a successful platform business, explaining ways to identify prime markets and importantly, how to monetize platforms. For business leaders, we drill down into the strategies behind some of today’s up-and-coming platforms, such as Tinder and SkillShare, and explain how companies can adapt in a changing marketplace. For traditional companies, we point to firms like Nike and McCormick spice that have built platforms in non-technology markets. For IT executives and those charged with developing and maintaining platform infrastructures, we delve into complexities to avoid and standards to implement.tinder.png


Some key takeaways from Chapter 1 include:

  • A platform’s overarching purpose is to consummate matches among users and to facilitate the exchange of goods, services, or social currency, thereby enabling value creation for all participants.
  • Because platform businesses create value using resources they don’t own or control, they can grow much faster than traditional businesses.
  • Platforms derive much of their value from the communities they serve. Platforms must therefore serve those communities wisely.
  • Platforms invert companies, blurring business boundaries and transforming firms’ traditional inward focus into an outward focus.
  • The rise of the platform has already transformed many major industries—and more, equally important transformations are on the way.


Intrigued? Learn more and order the book here.



GEOFFREY G. PARKER is a professor of management science at Tulane University and a research scientist at the MIT Initiative for the Digital Economy.

MARSHALL W. VAN ALSTYNE is a professor of Information Economics at Boston University and a research scientist at the MIT Initiative for the Digital Economy.

SANGEET PAUL CHOUDARY is the Founder and CEO of Platform Thinking Labs. He is also the co-chair of the MIT Platform Strategy Group at MIT Media Labs, Boston, and an Entrepreneur-in-Residence at INSEAD Business School.

Amid all the discussions about ecosystems, networks and platforms at the MIT IDE July Platform Summit, Sangeet Choudary drilled down to offer specific tips on getting started and designing what he calls "interaction-first" business models.


Choudary, the founder of Platform Lab and author of the new Kindle book, Platform Scale: How an emerging business model helps startups build large empires with minimum investment, told attendees that platform businesses differ significantly from other types of Internet businesses.

Going digital is not about merely improving efficiency of current operations, but “redesigning the boundaries” of what your business can achieve.


In these new models, transactions are no longer conducted along “linear pipes” as they were in industrial-era businesses. In that model, value was created upstream and delivered downstream to customers. With platforms, Choudary said, the goal isn’t to create more efficient pipes. Instead, platforms –like AirBnB or You Tube-- must create an infrastructure for external consumers and users to create value.


The lines between consumers and creators are blurring, and companies will increasingly compete and create value based on the strength of their ecosystem, not individual resources. In other words, processes are being replaced by interactions and the platform has to be designed to enable these key interactions, Choudary said.graphic1.png


Among other key points of his presentation, Choudary said:


  • Going forward, designers need to rethink the goal of the business in these new terms with emphasis on interactions.
  • “Don’t start with technology, start with the interaction and remove friction wherever it exists."
  • A multi-sided platform like LinkedIn is not a site, but a place where interaction occurs. Each business may define value differently—content, providers, services—and that will determine how the platform is built, as well.


  • Platforms struggle with infrastructure because they need to be both plug-and-play and open/participatory at the same time.
  • Achieving a balance between these two conflicting influences can be reached in two ways: managing access with good governance and gatekeepers and creating better content and access filters, according to Choudary. The right mix will depend on the site: Twitter has very few filters, for instance, but AirBnB has many, and more complex, filters.


Choudary is also a co-author, along with Geoffrey Parker and Marshall Van Alstyne, of the upcoming book: Platform Revolution: How Networked Markets Are Transforming the Economy - and How to Make Them Work for You , due out in March 2016.


Watch Choudary's full video of his presentation here. And watch Marshall Van Alstyne's video here.

Healthcare, education and law are poised to be the next major sectors hit by a digital platform tsunami.


According to tech and economic gurus speaking at the July 10 IDE Platform Strategy Summit,

these three fields have lagged many others in terms of digitization and now are ripe for new models that emphasize open platform ecosystems to deliver more efficient services.


Marshall VanAlstyne, an IDE organizer of the event, noted that any industry where information and community can collaborate and yield value can benefit from platforms. None will be exempt--even those with long-held traditions and standards, he said. (Read more about Marshall’s insights and platform strategies in this blog).


Health and law are two prime examples. Both are highly regulated industries with decentralized state authorities and disparate systems that platform enthusiasts said are holding back innovation. Each also carries ingrained cultural expectations and traditions that are inhibiting better care and services, it was argued.


Healthcare’s Failing Digital Pulse

Digital healthcare proponents pointed out several reasons that providers need to explore new business models. Giant firms are trying to expand from the top down while dozens of new entrants are coming into the market from the bottom-up to meet these needs.Funding-Grows-for-Digital-Healthcare-Startups-300x168.jpg


Vince Kuraitis, Principal and founder of Better Health Technologies, LLC and author of an upcoming book on healthcare platforms, said that Medicare is driving the industry to seek better outcomes from healthcare services. At the same time, payment and reimbursement formulas are being revamped causing disruption among consumers and practitioners. Digital platforms can help, he said: While there are “thousands of mobile medical apps for smartphones,” they aren’t connected. (Slides from the panel can be found here.)


Several panelists addressed this need for open systems to interconnect patient data and healthcare providers. For example, Julie Yoo, Co-founder and Chief Product Officer at Kyruus, offers patients an open-platform data search engine that matches doctors with appointment times. (More on her perspective can be found here.)


Fixing a ‘Broken’ Legal Profession

Perhaps the strongest case against the status quo was made by Eddie Hartman, co-founder of the LegalZoom law platform (pictured below). In his presentation, Hartman, a member of the California bar and an entrepreneur, said that

it’s time to transform the “broken, 300-year-old legal profession” which lacks “brands, trust, guarantees and convenience.” As a result of restrictive regulation against advertising, arcane billing processes and a disequilibrium between supply and demand, Hartman believes a platform marketplace “can be a good experience for clients and lawyers in a fragmented, closed industry.”



Learning to be Digital

In the case of higher education, which doesn’t even define itself as an industry, panelists offered platform alternatives that can digitize course content, mentorships and remediation—all the mainstays of university faculty and administrators, in other words. (Slides from the education panel can be viewed here.)


In light of soaring tuitions, uncertain job markets and new learning options, the discussion left Chris Dellarocas, Chair of the Digital Learning Initiative at Boston University, wondering what the role of the traditional university will be in the digital future. Universities must re-evaluate their structure and reflect on “what is our key value.” If not, he said, in education, as in every realm, “Platforms can be a death knell for those who don’t become leaders.”

How will you accommodate this rising tide of change?

Share your thoughts and visions.

Digital platform strategies are stepping into the limelight and leading mainstream business change.


daugherty.jpgAt the MIT IDE Platform Strategy Summit last week, Paul Daugherty, CTO of Accenture, (pictured, left) reinforced this concept to more than 150 industry and academic leaders talking about how much platform services are redefining ecosystems and industries. They are becoming so prevalent, he and other speakers noted, that

by next year 100 new digital industry platforms will be launched in sectors like retail, manufacturing, healthcare and law.

That’s a significant shift from the first wave of primarily high-tech businesses--Apple, Amazon, Facebook and Microsoft--that moved toward open networked partnerships versus products to create revenue and value.


And while there’s lots of buzz about disruptive platform upstarts—notably Uber, Lyft and Airbnb—taking on established markets without any products or infrastructure, Daughterty said that old-line businesses such as John Deere, Home Depot and Accenture's own cloud business are also rethinking their business models around service offerings. Many want to avoid the failures of Fortune 500 companies–think AOL and RadioShack--or the precipitous decline of BlackBerry's market share. The new models create network-effect value for customers and the business by collaborating with others. Tractor company John Deere, for example, is turning its main product into a platform for improving crop production.

Eighty-one percent of those surveyed by Accenture believe that industry boundaries will blur as platforms reshape organizations into interconnected ecosystems, and 60% plan to engage new digital partners within their industries in two years, Daugherty said.


Marshall VanAlstyne, an IDE organizer of the summit and platform expert also highlighted the dramatic change caused by network effects. He contrasted Kodak’s decline with Instagram’s rise, for instance, and Toyota’s huge resources versus Uber’s determination and moxie. Platform providers are “knocking off established market cap leaders” by offering “rich, industry building blocks and services,” he said. (View his slides here). Later in the day, panels examined the healthcare, education and legal industries, in particular. Apigee CEO Chet Kapoor, also discussed how traditional firms like Walmart, Burberry and Nike entered the platform ecosystem, as well. (See full agenda here.)


Naturally, there are still many challenges to overcome and dichotomies that every business will have to balance. Among these, Daugherty offered several key challenges to consider: how much to compete or to partner; whether to keep business and APIs proprietary versus open; the dilemmas posed by data sharing and openness, and how much to fund new investments or leverage existing resources.


Ultimately, platform businesses must shift their mindset and models to selling outcomes, not products, experts said. And that involves lots of self-examination about what business you are in now and where you’ll be in the future. It also means that just as industries figure it out, a new crop of upstarts—with even newer technology tools-- may take the limelight tomorrow.



For more on the event, follow #platformsummit on Twitter. Also see previous digital community blogs and news coverage here and here. Daugherty's slides can be found here.

Watch video clips from Marshall's April 2015 presentation here.

Marshall Van Alstyne,  professor at Boston University’s School of Management and a Research Scientist at MIT’s IDE, will discuss Platform Shift: How New Business Models Are Changing the Shape of Industry, in London on April 10.


Van Alstyne joins IDE co-directors and authors of The Second Machine Age, Erik Brynjolfsson and Andrew McAfee, as well as Roberto Rigobon, MIT Professor of Management and Applied Economics, at the upcoming conference.


A few key concepts from Van Alstyne’s research are highlighted below. A video of a previous presentation on The Rise of the Platform can be viewed here.



Platform firms are quickly displacing traditional market leaders, he says. What’s causing this change?




Van Alstyne notes that BlackBerry’s unraveling is just one example of strong products that did not open their ecosystem to become platforms.



In an upcoming new book, Van Alstyne and co-authors explain how platform communities, not great products, will have the market edge going forward. “The rules have changed,” he says.

slide 22.jpg



In this new scenario, Van Alstyne says that yesterday’s leaders must take note of new types of competitors reshaping tomorrow’s marketplace. Companies that are able to transform their linear business model into a network model will have a competitive advantage.


slide 106.jpg

At the MIT Platform Strategy Summit held in July, IDE professor Marshall Van Alstyne interviewed  Rich Miner, Android's co-founder, about investments and investing as a platform ecosystem. They also discussed Android's stunning rise, acquisition and  bumps along the way.


Miner said that when he and his partners at Android developed an open-source mobile OS in 2007, competing with Apple was surely a goal, but they never expected that billions of Droid devices would overtake IoS as the dominant mobile platform that it is today.


Since Google acquired the platform in 2009, Android--and its platform ecosystem-- have grown exponentially by adding developers, OEMs, and acquiring other companies. Along with Android, its consumer and enterprise user ecosystem has also skyrocketed.


In the following video clips, Miner spoke with Van Alstyne about what qualities he looks for when investing in platform products or businesses. He also discussed some of the lessons he’s learned from Android’s meteoric success and about platform communities and open system overall.






Leading up to the MIT PLATFORM STRATEGY SUMMIT to be held on July 25, Marshall Van Alstyne, Research Associate at the MIT Center for E-Business and Associate Professor at Boston University, recently discussed how platform business models are rapidly reshaping the structures and conditions of many industries. Among these are media, energy, telecommunications, social networking, publishing, academia, gaming and retail. Organizations are finding their current business models to be insufficient or ineffective for addressing the challenges and behavior of platform-based markets.


Van Alstyne explained some of the basics of “platform economics,” or why companies such as Uber, Apple, and Amazon are so successful—and what traditional product makers can do to emulate them. Below are some clips from his May presentation at the annual IDE/CDB meeting.


More information on platform economics can be found here and here



By Sangeet Paul Choudary, Geoffrey Parker and Marshall Van Alstyne

Nokia just sold to Microsoft. Blackberry lost $1 billion, will lay off 4,500 employees, and is selling itself to a private equity group. Barnes & Noble is parting company with the Nook and struggling to survive. These firms once offered great products but never great platforms. Meanwhile, Twitter, with an ecosystem of more than 1 million apps, filed its IPO to raise $1 billion. Google’s Android grows stronger and is moving beyond smartphones to power cars, home electronics, and wearable accessories. A thriving Amazon and Kindle continue to transform publishing, most recently with the launch of a fan fiction platform.  In the hotel industry, AirBnB poses a serious threat to the revenues of established players and is disrupting the housing market.


We used to live in a world where commerce flowed linearly. Firms added value to products, shipped them out and sold them to consumers. Producers and consumers held very distinct roles. Value was created upstream and flowed downstream.


Now, market upstarts are displacing market leaders faster than ever before as entire industries transform. Today, three of the top five U.S. firms by market cap – Apple, Microsoft & Google – run business platforms. We are in the midst of a seismic shift in business models, powered by the Internet and a generation of connected users.


Platform firms are networked ecosystems that connect multiple players, provide tools for them to contribute and interact, and rules that govern participation. Facebook, Uber, and Ebay typify such network platforms. They aide the creation of new markets by connecting producers and consumers with each other. In such markets, consumers can become producers.


Three factors will speed further disruption:

  • Platforms will displace high cost gatekeepers with meritocratic crowds. YouTube and eBay flip the gatekeeping process used in media and retail. In lieu of professional editors and buyers, anyone can produce and the market itself decides what the market wants.


  • Platforms will aggregate disconnected players in fragmented industries. OpenTable, an online reservation system, is rolling up unaffiliated restaurants and boosting their revenues. RedBus, the world’s largest bus reservation platform, is gathering India’s fragmented bus schedules and reshaping the travel landscape.


  • Platforms will unlock new value from spare resources and user-generated content. AirBnB’s hosts and RelayRides’ cars are the spare rooms and idle rides of thousands of individuals. Much of Facebook’s appeal is the newsfeed produced from constant user activity. Instagram’s $1 billion sale was a consequence of the work, not of 13 employees, but of more than 30 million contributors.


Each of these is enabled by ubiquitous network access with mobile penetration, reputation systems that enable trust among distributed strangers, and access to low-cost shared infrastructure with tools and data to capture and coordinate interactions.


Ultimately, this transformation redefines competition. Firms that once sought advantage based on the strength of their internal resources and channel access now face competitors that harness armies of connected users and ecosystems of resources. Apple’s App Store, hosting nearly a million applications, offers a compelling testimony to the power of ecosystems. More buyers on Ebay attract more sellers, which in turn attracts more buyers. More freelancers on oDesk attract more job postings and vice versa. Such feedback loops enable these businesses to grow into massive juggernauts. Businesses win based on their ability to captivate third parties and connect them to each other through creative interactions.


The rise of ecosystems also means that old linear rules no longer work given new platform realities. In operations, just-in-time inventory gets trumped by “just-not-mine” inventory. The IT function transforms from client server support to cloud service solution. In marketing, the profit maximizing price is often at or below zero. Charging every user can destroy network effects, yet data and network effects create critical competitive advantage.


Platforms aren’t merely a Silicon Valley obsession. WalMart continues to invest in big data and is leading a retail evolution to the store-as-platform model. Nike+ is showing how the shoe can become a connected platform. Car manufacturers are building connected cars. And GE is forging ahead with its smart grid platform.


But, for every GE moving forward, there is an incumbent resisting change, often relying on regulators to stave off emerging platforms. Uber’s disruption of public transportation has had to contend with many regulatory hurdles. AirBnb has run afoul of housing laws. And Kickstarter crowdfunding has been caught by public securities laws. Since regulation often lags innovation, this can succeed, but only, we predict, for a short time.


What investment opportunities do these changes present? To act on platform opportunities, consider the three factors transforming industry:


  • Firms that leverage user capabilities outside their business to complement their experts, are poised to scale faster than those that don’t. They typically build social curation and reputation systems to employ the collective intelligence and judgment of your users.


  • Firms that connect consumers to their best product options through data-driven matchmaking generate more transaction revenue. The firm that builds an OpenTable for consumer finance, considering appetites for risk and reputations of products that deliver on promises, would help buyers make sense of the dizzying array of complex and disconnected products, adding enormous value.


  • Finally, firms that can leverage external capacity are poised for tremendous return on assets. In transportation, a firm that utilizes other people’s trucks before expanding its own fleet will increase ROA.


Platform opportunities are all around us. Industries like Education, HealthCare, Insurance, and Legal Services, are ripe for disruption. In an increasingly connected future, platforms will only grow in importance. We need to construct the frameworks and rules to allow everyone a fair shot at success in this new world.


In 2011, Nokia’s CEO Stephen Elop sent out the “Burning Platform” manifesto to his employees. But it was too late; the rules had already changed. What happened to Nokia and Blackberry can happen to any business that doesn’t leverage the power of platforms. For those willing to open their ecosystems and aid their consumers, the future looks bright indeed.



About the Authors:

Sangeet Paul Choudary (@sanguit) is an entrepreneur and author, blogging at Platform Thinking.

Geoffrey Parker (@g2parker) is professor at Tulane University’s Freeman School of Business, startup advisor, and research scientist at MIT Sloan School of Management.

Marshall Van Alstyne (@InfoEcon) is associate professor at Boston University School of Management, a company founder, and research scientist at MIT Sloan School of Management.

By Marshall Van Alstyne, Geoffrey Parker and Sangeet Choudary


There’s a pattern to spotting economic revolutions: look for catalysts borne of changes in information, automation, or connectivity. The printing press produced masses of information that presaged the renaissance.  The steam engine produced automation and the railroad connectivity that ushered in the industrial revolution. While the scale is smaller, there’s a revolution in connectivity underway now that is changing industry. As a result, pricing, supply chains, financial models, antitrust laws, and sources of competitive advantage are different.


Disruption is occurring based on a latent form of network effects. Ever-cheaper information and connectivity have revealed demand-interdependent or “two-sided” network effects that are turning old concepts upside down. For instance, we intuitively understand that a product with network effects gets more valuable as more users use it: Think about telephones, FAXes, and email gaining critical mass and creating S-shaped growth. But two-sided network effects are different. Here, a product or service gets more valuable to one group of users the more another group uses it. Consider that a single Internet searcher gets more value as others produce more web content, just as a single content producer gets more value as the audience of searchers grows.


Platform businesses match and benefit from these two-sided networks. AirBnB matches people with spare rooms to people with travel plans. YouTube matches content creators to content consumers.  eBay matches buyers to sellers. oDesk matches tasks to talent, just as Apple iTunes matches users to apps and listeners to music. Connectivity-based network effects are as old as the railroads, but two-sided network effects became visible with the rise of the World Wide Web.


Before 1989 it might have been possible to do what these firms do, but it would have been difficult. That’s when researchers at the European Organization for Nuclear Research (CERN), proposed a way "to link and access information of various kinds as a web of nodes in which the user can browse at will." Before the Web, you needed a printed directory to find a bed and breakfast, or a Kelly Services to hire temporary labor. Getting the music or video you wanted required trips to Tower Records or Blockbuster. If you didn’t want to pay, you might have borrowed from a local library. The best approximation for on-demand music was call-in radio.


New Rules, New Games

The Web has changed commerce forever. Beyond the hype that Internet boosters like Wired proclaim, the rules really are different. Prices below marginal cost can maximize profits. Linear supply chains fall to supply ecosystems. Classic antitrust tests of predation fail.  Models of customer lifetime value leave MBAs scratching their heads when the services are free. The “resource-based” view of the firm holds that competitive advantage derives from control over novel resources, yet Google grows with each gmail account granted, each video posted, and each web page hosted--and it lacks even a copyright interest in any of this. Information technologies do not simply automate; they obliterate accepted business models.


The chief difference, again, is interdependent demand. Latent feedback dependence becomes visible as the costs of interaction and of universal “browsing at will” fall to zero. The more spare rooms AirBnB has, the more travelers it attracts and the more they list their own spare rooms. eBay buyers need sellers and vice versa. The more content YouTube hosts, the more eyeballs it attracts, the more users seek fame by creating content. Before the Web, high costs of interaction provided friction on this feedback. The traditional retail models of Tower Records and Blockbuster made sense. You needed to aggregate content or services from specialized producers then take it to markets where you could find the demand for the products you controlled.


Free universal browsing reveals interdependent demand. This means you can subsidize one side of a network, i.e. price below marginal cost, in order to charge more to the other side. The profits lost on subsidized users are swamped by profits gained on charged users. Classic antitrust tests fail because, despite devastating effects on competition, both sets of users are better off using a single market rather than a fragmented market to transact. The lifetime value of the free customer is measured by the change in elasticity and lifetime value of the matched customers. The resource-based view is undone! AirBnb, oDesk, eBay, iTunes, and YouTube do not own what they sell nor do they even control the assets used to produce what they sell. Instead, competitive advantage derives from the ability to consummate the match. The more matches, the more transactions, the more value they create.  Platforms that perform matches efficiently have developed as a new ecosystem model of commerce.



Are you intrigued by these ideas? Want to learn more? Spend a full day learning how businesses can develop tremendous competitive advantage by using a platform strategy. CDB Fellow Geoff Parker will join me and other experts at the Platform Strategy Executive Symposium July 26 at MIT. View the agenda and register here.

As noted in my previous blog, the first of our 10 Recommendations Toward a Digital Future for International Post Corp. is to open platforms to third parties, and aid their business models. Openness is a key point in ensuring that platform models are successful and therefore, this recommendation merits more in-depth discussion and definition.


One of the first issues is what does "openness" mean?  A full definition can be found in Opening Platforms: How, When and Why, but the basic insight is to offer greater rights of access to different communities with different roles. More precisely, this means giving rights of access or rights of modification to end users, developers (supply-side users), platform providers, and platform sponsors as in Figure 1 below.


The platform provider is the point of contact for users, even though this role does not necessarily have property rights. The platform sponsor controls critical ecosystem property rights. For example, if the platform sponsor is Microsoft Windows, then the platform provider can be Dell or Hewlett Packard.Components        Rules      Ecosystem

Figure 1


Opening different parts of the platform increases growth of that part of the ecosystem but also reduces control and ability to charge for that part of the ecosystem. Great ecosystem design is then a choice to open those parts that promote growth yet leave you with control over critical resources where you have an advantage.



As we describe in the IPC report: “Open means that the platform creators are willing to give up some of their own profits in order to seed interest, increase overall value and build an ecosystem through others.


A platform creator should consider what level of openness is acceptable. If you are too open – such as Linux-- no one is driving the bus, which does not optimize the value of the platform, and therefore, builds a smaller network. Too much control, however, means not enough innovation, not enough meaningful and relevant content, and therefore, not a big enough ecosystem to create a meaningful match – Apple, in the 1990s.


Openness, then, requires a balance of access, providing value to the ecosystem partners and value to the platform.


While closed platforms do create value, they tend to be limited in both scope and market penetration. When Facebook opened itself to developers, for example, it experienced massive growth relative to MySpace which had entered the market earlier. Openness in the right place works because developers then push out the demand curve themselves by innovating and creating more value. ..Openness at the demand and supply side are critical to building out the ecosystem, creating volume and thus value.”




Recommendation: Open Platforms to Third Parties and Aid their Business Models



Figure 2: Graphic illustrates that within country, a single IPC member can represent the point of customer contact. Intellectual property can be shared among IPC members.


The number of IPC members, across 24 different countries, implies there should be shared property rights in the platform. The green portions of Figure 2 show what should be open. This will encourage consistent adoption of technology standards and limit dominance of one member over another. It also encourages developers to contribute applications to the platform.





Figure 3: Graphic illustrates that across countries (markets), there can be multiple points for customer contact.

A number of IPC Member Posts have had the wisdom to realize that platform business models exist. A handful have even opened or sought partnerships to push this forward. Yet a platform should not be a single function application. Instead, it needs a suite of functions that can be combined in novel ways to create a space of opportunities.



IPC Member Posts should apply openness strategies retrospectively to physical plant and infrastructure, delivery services, and logistics. Allow third parties to help Posts innovate. The point is to open spare capacity in ways that other interested parties can figure out new ways to use them. This is a point often missed in digital platform discussions yet it remains one of the key opportunities for IPC Members Posts.

Recommendation: Seeding and Partnerships to Help Launch

Another recommendation (#6), Use Platform Envelopment, Seeding, and Partnerships to solve the chicken-and-egg launch problem, is also worthy of further discussion. Without these critical approaches, the launch of digital platforms can be stymied.




Specifically, “The classic difficulty for building a platform is the chicken-and-egg launch problem. Users of a platform want content and applications before they will use it; developers for a platform want users before they will provide content and applications. Each side wants the other to commit before it will spend resources to adopt the platform. This is a "critical mass" problem. There are several strategies to promote successful launch.


The point of seeding is to fill the platform with content or applications, preferably material that is already in high demand, in order to attract users. IPC Member Posts could take this approach by providing access to all kinds of e-government documents and services, for example.

Another common launch strategy is to identify key user groups, or so-called “marquee” developers, and offer them attractive reasons to participate. The Posts could do this by targeting bulk mailers and offering them attractive reasons to reach large populations associated with digital post platforms.


Finally, another strategy is to envelope users onto a platform, taking advantage of the current user base to move into adjacent markets. If IPC members can establish a digital relationship, say for eGovernment services, involving a large citizen population, it can then absorb adjacent platforms into the user base by adding applications.


As illustrated just by these two recommendations, it becomes clear that there are many ways for IPC members to leverage their existing models to prosper in digital markets. Please refer to the full report for elaboration of each point.


The Outlook

In summary, there is considerable hope for IPC Member Posts to reach the next step and become digital businesses. In answer to the questions posed on the scope of tasks, we have several results. If the core question is whether there exists a digital platform strategy for postal services, the answer should unequivocally be “yes.” If the question is whether current IPC members will be the ones to seize the initiative and own these services, the answer is “maybe.” It depends on IPC Member Posts willingness to pursue digital strategies analogous to, but quite different from, their physical strategies. If the question is how to proceed, we offer ten recommendations to get there.


IPC members possess a number of remarkable assets – large user populations, dedicated workers, more contact points than most businesses, and even government protected services. These can form the basis of a digital platform. By organizing around a VISA-like structure, IPC members can gain critical mass and market power. By defining low-level functions and opening the system, IPC members can create a platform. By seeding the platform, partnering with marquee users, and enveloping adjacent markets, IPC members can launch and expand. These partnerships can also mitigate risk. By pricing in two-sided fashion at architectural control points, members can gain new revenue streams. By applying these insights retrospectively to physical assets, they can recover lost ground and grow long-term sustainable business models.





Note: The publication of the White Paper is the culmination of more than a year’s collaboration between IPC member postal operators, IPC’s market research team and MIT Sloan School of Management’s Center for Digital Business. The theme and title IPC’s 2011 Annual Conference was ‘Digital business: opportunities to create value’ at which White Paper co-author Professor Marshall Van Alstyne presented to postal CEOs the value of developing integrated platforms.

International Post Corp., represents a fascinating case study of an industry sector – in this case the public post system – seeking to digitize operations in the face of fierce online competitors.


As noted in my previous blog, Tulane Professor Geoffrey Parker and I recently conducted an in-depth study for MIT’s Center for Digital Business and IPC in which we applied historical context and the concepts of platforms and two-sided networks to offer a roadmap and options that Post members could follow in their move toward digitization. This two-part article will summarize our findings and our ten recommendations. While specific to the Posts, I believe that many of the findings can be applied broadly to other industries facing similar challenges.


As background, International Post is a cooperative association of 24 member postal operators in Asia Pacific, Europe and North America. In our White Paper, A Digital Postal Platform: Definitions and a Roadmap, we state that:



“The posts have been facing declining volume of physical mail and low utilization of physical assets. Much of this is caused by users moving to digital communications for letter mail and by advertisers moving to online media such as Google AdWords, Groupon, and Facebook.

“Changing mail flows result from multiple trends: Broadcast media and mass mailings are becoming interactive and personalized. Digital bill presentment is moving online. Mobile devices enable individual tracking and broader reach regardless of location. Power is shifting from senders to receivers as information overload reduces the effectiveness of un-targeted communication and as screening technologies let recipients choose which communications they will receive when and where.”

Moreover, “New entrants and players in niche markets, like Zumbox, Volly, and Amazon’s drop-shipping, are challenging the traditional markets held by Posts. Many firms and industries – in analog photography, analog telephony, newsprint, video cassettes, DVD rental, and music discs – also have been reshaped by digital competition. Organizations in such industries have shrunk, transformed, or exited.”


With this as the backdrop, we set out to answer a series of questions: Primarily, Is there a Postal digital business model equivalent to the physical business model? If so, how would it work?


We also considered whether there are ways to compete with strong contenders such as IM, Facebook and Google, as well as other large, entrenched players. If so, how do you get all of the moving parts to work?


In the physical world, we noted: “Postal business models can be thought of as platforms -- two-sided networks that match senders and receivers. Most Posts also play both a sponsor and provider role: senders supply the content for a fee to the receivers who receive content for “free.” How can this platform and network be leveraged and enhanced to be relevant in the digital age?”


Taking the Next Steps

As part of our research, we interviewed dozens of experts at different postal services as well as their competitors to find out what applications and strategies Posts are implementing in order to enter digital markets. We learned that Posts have been trying to address the move to digital communication in several ways, most notably, by launching applications such as hybrid mail, secure digital eBox, digital identities, and other products and services, but their efforts don’t go far enough.


The outlook is promising, however, and we believe that the Posts -- with their diverse assets and competencies -- can generate revenue if they go beyond standalone products and become digital platform players.


Our ten specific recommendations include the following:

  1. Open platform to third parties, and aid their business models
  2. Enumerate functions that can serve as platform foundations, and choose features conferring control
  3. Redefine the Universal Service Obligation
  4. Use a Visa-type model for organizational structure
  5. Articulate the space of platform opportunities for developers and develop demonstration projects
  6. Use platform envelopment, seeding and partnerships to solve the chicken-and-egg launch problem
  7. Price to drive adoption using two-sided network strategies
  8. Re-examine the concept of trust in the digital space, and its differentiation from trust in the physical space
  9. Consider the integration of permission-based advertising to raise revenues
  10. Apply platform concepts retrospectively to physical assets

The white paper provides more detail on definitions, development, and implications for the ten recommendations.

In my next blog I will delve deeper into a two specific recommendations and outline our overall conclusions.

Note: The publication of the White Paper is the culmination of more than a year’s collaboration between IPC member postal operators, IPC’s market research team and MIT Sloan School of Management’s Center for Digital Business. The theme and title IPC’s 2011 Annual Conference was ‘Digital business: opportunities to create value’ at which White Paper co-author Professor Marshall Van Alstyne presented to postal CEOs the value of developing integrated platforms.

As global enterprises seek to adopt digital business models, they need to understand the fundamentals of digital platforms and their many implications. Organizations need to decide on their business model as well as their digital platform objectives. Will they pursue closed or open systems? Free or charged? Cooperative or competitive? Because supply and demand effects can be significant, organizations might need to establish new roles and governance as well.


I offer a brief summary here of our research into platform economics and its implications for businesses.  For a full discussion and further research findings, please read more here.


Overview: Platforms and Ecosystems

Platforms have been defined in various contexts by different people over the years, but the common underlying theme is that a platform is the set of components used in common across a product family whose functionality can be extended by third parties (Boudreau 2007) and which is characterized by network effects (Eisenmann, Parker & Van Alstyne 2006, 2011).  As such, Apple’s iTunes and iPad, most computer operating systems, smartphones, game consoles, eBooks, social networks, and medical HMOs all qualify as platform markets; common components shared and extended by third parties.


Gawer (2009) defines platforms as the building blocks that act as a foundation upon which an array of firms-- often called a business ecosystem-- can develop complementary products, technologies or services. One must be very careful, however, to distinguish between industry platforms and product platforms, which simply represent reconfigurable building blocks, like Legos,™ that do not involve innovation by other parties.

All components of a platform are rarely developed within a single firm and in fact, for most successful platforms, it is the ecosystem spawned by these platforms that gives the platform its strength. In a typical platform market, value is exchanged between participants in a triangular relationship where the platform provider extracts rent by charging one side of the market for access rights.  Furthermore, because of the nature of networks, platforms, and the ecosystems that arise around them, do not have standard linear supply chains.


Two-sided Markets



Figure 1


To understand platforms, you need to first understand two-sided networks, also called two-sided markets. These are economic exchanges with two distinct user groups that provide each other with network benefits (see figure 1, from Eisenmann, Parker, Van Alstyne, 2009). Example markets include credit cards, composed of cardholders and merchants; HMOs (patients and doctors); operating systems (end-users and developers), travel reservation services (travelers and airlines); Yellow pages (advertisers and consumers); video gamgae consoles (gamers and game developers); and communication networks, such as the Internet.


Benefits to each group exhibit demand economies of scale. Consumers, for example, prefer credit cards honored by more merchants, while merchants prefer cards carried by more consumers. They are particularly useful for analyzing the chicken-and-egg problem of standards battles, such as the competition between VHS versus Beta, Blu-Ray versus HD-DVD, or HTML5 versus Adobe Flash. They are also useful in explaining many free pricing or "freemium" strategies where one user group gets free use of the platform in order to attract the other user group. Two-sided markets represent a refinement of the concept of network effects. They were conceived independently by Parker & Van Alstyne (2000; 2005) to explain behavior in software markets, and by Rochet & Tirole (2001) to explain behavior in credit card markets.


The platform provider and/or sponsor is an intermediary facilitating exchange –value lies in the ability to facilitate an exchange that would not otherwise happen. Successful platforms help to consummate a match. Who gets charged by the platform helps define how the platform ecosystem grows.

  1. In our recent in-depth study of International Post Corp., we applied this historical context and the concepts of platforms and two-sided networks, to offer options that the Post members could follow in their move toward digitization.
  2. Posts have been trying to address the move to digital communication by launching applications such as hybrid mail, secure digital eBox, digital identities, and other products and services. We believe that the Posts, with their diverse assets and competencies, can generate revenue if they go beyond standalone products and become digital platform players.


Specifics of IPC will be discussed in my next blog.




Additional references:




MARSHALL VAN ALSTYNE is associate professor of information economics at the Boston University School of Management and research scholar at MIT. His research focuses on information access, technology and networks. His MIT thesis work introduced "cyperbalkanization," describing the influence of IT on social fragmentation. Subsequent work introduced "two-sided" market theory used to develop platform business models. He is currently studying information markets and open innovation systems.

Marshall studied computer science at Yale and managerial economics at MIT, and he holds patents on protecting communications privacy and managing email lists. His work on communication flows was among the first to measure individual dollar output from the use of IT, and his theories of network businesses are now taught in more than 50 business schools worldwide. Science, Nature, the New York Times & the Wall Street Journal, all cite his work.

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