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.