Platform Economics

7 Posts authored by: Paula Klein

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.

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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.”

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.

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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.”

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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.

 

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

 

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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.

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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.

 

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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

 

   



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