PLATFORM POWER Secrets of billion-dollar internet startups Sangeet Paul Choudary Based on the blog Platform Thinking (http://platformed.info) © 2013 Sangeet Paul Choudary All Rights Reserved. No part of this publication may be reproduced, distributed, or transmitted in any form or by any means, including photocopying, recording, or other electronic or mechanical methods, without the prior written permission of the publisher, except in the case of brief quotations embodied in critical reviews and certain other noncommercial uses permitted by copyright law. For all queries, please email, [email protected] Introduction Credits: Fran Simo Creative Commons As internet startups, we often believe that we are in the business Airbnb enables hosts and travelers to interact and engage in of building technology. The essays in this book set out to debunk commerce. that view. Instagram enables photo creators to show off and discuss their Several monikers and catch-phrases have been used to creations with photo viewers. characterize trends in recent times. Web2.0, Crowdsourcing, These are all examples of platform business models connecting Collaborative Consumption, Sharing Economy, App Economy, producer and consumer roles and allowing them to interact with Gamification are some of the terms that come to mind. Observed each other. closely, there are three common threads that underlie all of these trends: The essays in this book aim at explaining the importance of these models, why these models are emerging at this point in time and 1) The focus on the user as someone who does work why they will be the dominant model for business in a networked 2) The notion of value created in an external ecosystem of users world. 3) The idea that this value is created when users interact as Welcome to the platformed world! Here’s your guide and I hope producers and consumers you enjoy the view! These factors underlie the importance of platform business models in business today. And internet startups are leading the Sangeet Paul Choudary way. Very briefly, platform business models enable creation and exchange of value between users, with the firm (startup) acting as an infrastructure enabling users to interact. Wikipedia enables creators to create a knowledge base and consumers to consume that information. 2 Section 1 Platform Business Models Credits: Petr Jan Juračka Creative Commons Chapter 1 The Building Blocks of Platforms KEY QUESTIONS We typically think of companies competing over products — the proverbial “build 1. What is a Platform? a better mousetrap.” But in today’s networked age, competition is increasingly over platforms. Build a better platform, and you will have a decided advantage 2. Why are we seeing the emergence of over the competition. platforms? 3. How do I go about building a platform? In construction, a platform is something that lifts you up and on which others can stand. The same is true in business. By building a digital platform, other businesses can easily “By building a digital platform, connect their business with yours, build products other businesses can easily and services on top of it, and co-create value. connect their business with This ability to “plug-and-play” is a defining yours, build products and characteristic of Platform Thinking. services on top of it, and co- create value.” TWEET Consider the market for smartphones. Nokia and Blackberry today are a shadow of their former glory. Their technology and products lag Apple and the Android ecosystem. But the triumph of Apple and Android is not from features and functions. It is from the app store on which external developers create value. Microsoft has gotten excellent reviews for the technology in its new phones, but it is the ability to create a successful platform that will determine its ultimate success. Source: Platform Thinking 4 The use of platform thinking extends beyond the tech sector. “pull.” Where traditional ecosystems push, these new platforms Retailers are shifting from distribution channels selling products, pull. Platforms also rely on the power of network effects — as to engagement platforms co-creating value. Online retailers like they attract more users, they become more valuable to those eBay, Etsy, and Amazon led the way, and now traditional retailers users. And there’s a growing academic literature that explores the are following. unique quality of value creation on what are called “multi-sided platforms.” Nike is shifting from products to platforms. Building on the success of its Digital Sport products, Nike recently launched In our view, the success of a platform strategy is determined by its Nike+ Accelerator to help companies build on the Nike+ three factors: platform. Nike’s announcement reflects platform thinking. “We are Connection: how easily others can plug into the looking for people who want to create platform to share and transact companies that build upon the success of “The rise of platforms is being driven by three transformative technologies: cloud, [Nike+] to make the world more active.” Gravity: how well the platform attracts social, and mobile.” TWEET The rise of platforms is being driven by three participants, both producers and consumers transformative technologies: cloud, social, and mobile. The cloud Flow: how well the platform fosters the exchange and co- enables a global infrastructure for production, allowing anyone to creation of value create content and applications for a global audience. Social networks connect people globally and maintain their identity online. Mobile allows connection to this global infrastructure Successful platforms achieve these goals with three building anytime, anywhere. The result is a globally accessible network of blocks: entrepreneurs, workers, and consumers who are available to create businesses, contribute content, and purchase goods and The Magnet creates pull that attracts participants to the platform services. with a kind of social gravity. For transaction platforms, both producers and consumers must be present to achieve critical Readers will recognize a number of intellectual foundations to mass. Apple needed to attract both developers and users. platform thinking. These range fromGeoffrey Moore’s Similarly, eBay needed both buyers and sellers. Platform builders ecosystems to John Hagel and John Seely Brown’s focus on Source: Platform Thinking 5 must pay attention to the design of incentives, reputation In the future, we will see more and more companies shifting from systems, and pricing models. They must also leverage social products to platforms. Even those in the extermination business media to harness the network effect for rapid growth. may worry less about building better mousetraps, and more on building mousecatching platforms. For example, imagine a smart The Toolbox creates connection by making it easy for others to mousetrap with sensors that wirelessly communicate to a cloud- plug into the platform. This infrastructure enables interactions based MouseCatcher service. Homeowners and exterminators between participants. For example, Apple provides developers could monitor the status of the trap on their smartphones, with the OS and underlying code libraries; YouTube provides receiving a text message when it hosting infrastructure to creators; Wikipedia provides writers with is out of bait or needs checking. “Platforms bring participants the tools to collaborate on an article; and JC Penney provides Smart traps already exist. But the in, create the conditions for stores to its boutique partners. value creation and match shift from products to platforms participants to each other.” The Matchmaker fosters the flow of value by making would focus on building the TWEET connections between producers and consumers. Data is at the service (the Trapp Store?) that heart of successful matchmaking, and distinguishes platforms enables anyone with a smart trap from other business models. The Matchmaker captures rich data to connect and communicate. about the participants and leverages that data to facilitate Every business today is faced with the fundamental question that connections between producers and consumers. For example, underlies Platform Thinking: How do I enable others to create Google matches the supply and demand of online content, while value? Building a better mousetrap still might not have the world marketplaces like eBay match buyers to relevant products. beat a path to your door. But the right platform might just do the Not all platforms place the same emphasis on all three building trick. blocks. Amazon Web Services has focused on building the Toolbox. Meanwhile, eBay and AirBnB have focused more on the Magnet and Matchmaker role. Facebook has focused on the Note: This article was co-authored with Mark Bonchek. Toolbox and Magnet, and is actively building its Matchmaker ability. Source: Platform Thinking 6 Chapter 2 Overview of Business Models: Pipes vs. Platforms There are two broad business models: pipes and platforms. You could be running KEY QUESTIONS your startup the wrong way if you’re building a platform, but using pipe strategies. 1. What is a Platform business model? 2. How is it different from traditional business More on that soon, but first a few definitions. models? 3. How are internet businesses different from traditional businesses? PIPES 4. Why do most internet businesses fail? Pipes have been around us for quite some time now. They’ve been the dominant model of business. Firms create stuff, push them out and sell them to customers. Value is produced upstream and consumed downstream. There is a linear flow, much like water “The world is moving from flowing through a pipe. Pipes to Platforms, from linear to networked We see pipes everywhere. Every consumer good business models.” TWEET that we use essentially comes to us via a pipe. All of manufacturing runs on a pipe model. Television and Radio are pipes spewing out content at us. Our education system is a pipe where teachers push out their ‘knowledge’ to children. Prior to the internet, much of the services industry ran on the pipe model as well. Source: Platform Thinking 7 This model was brought over to the internet as well.