In 2007 a weak Apple with less than 4% market share in desktop operating systems and none in mobile phones was surrounded by five 800 pound gorillas – Nokia, Samsung, Motorola, Sony Ericsson and LG. These corporations controlled 90% of the industry’s global profits. The iPhone was introduced in 2007. By 2015, the iPhone singlehandedly generated 92% of global profits, while all but one of the former incumbents made no profit at all.
Apple, along with Google’s competing android system decimated the competition by exploiting the power of platforms and leveraging the new rules of strategy.
Platform businesses bring together producers and consumers in high value exchanges. Their source of power is information, exchanges between participants on the platform and the value created by such interactions.
The iPhone was conceived not as a product or a conduit for services. It was conceived as a way to connect participants in two sided markets. App developers on one side and app users on the other –creating value for both groups. Six years earlier the iPod had done something similar, becoming the ultimate exchange between music companies and music lovers, decimating competition from entrenched MP-3 players. While MP-3 players were devices, the iPod coupled with iTunes was the ultimate music exchange- a platform, not a mere product.
As the number of participants on each side of the iPhone – App store axis grew, the value increased. A phenomenon called “Network Effects” which is central to the platform strategy.
By January 2015, the company’s App store offered 1-4 million apps and had generated $ 25 Bn for developers.
Firms that don’t learn to leverage the power of platforms and play by the new rules of strategy will be unable to compete for long.
The concept of the platform is not new to business. Stock markets connect investors and investment seekers. Malls connect retailers and buyers. Newspapers connect advertisers and readers. So what is new?
Information Technology. IT has reduced the need to own physical infrastructure and physical assets. IT makes building and scaling up platforms vastly simpler and cheaper, permits seamless participation, enables radical scaling of the quantum of data that can be captured and the ability to analyse, process and disseminate it.
Is Apple the only company to benefit from platforms? Certainly not. Google (and Android), Face book, Uber, Airbnb, Amazon, Alibaba have used platforms to disrupt their respective industries.
The Platform Ecosystem
- Platforms have an ecosystem with the same basic structure.
- Owners of the platform control their intellectual property and governance. (App Store)
- Providers serve as the platform’s interface with users. (iPhone)
- Producers create offerings. (Application developers)
- Consumers use their offerings. (Application users, the iPhone owners)
Conventional businesses are structured as Pipelines. Pipeline businesses control a value chain in a linear configuration. Input materials- value addition- finished product distribution and sales. The business conducts each activity in the value chain within the organisation or using an ever diminishing community of partners.
Apple’s iPhone business is a pipeline. The App Store, the marketplace that connects App developers and iPhone owners combines with the iPhone to create a platform.
What then are the key differences between managing Pipelines and administering Platforms?
1. Resource Control to Resource Orchestration
Pipeline companies own or control almost every aspect of the value chain. Platforms leverage networks of producers and mobilise resources at their disposal.
With platforms the assets are the community and the resources its members own and contribute – be they apps, music, cars, books, rooms, ideas or information. The platforms chief assets are its network of producers and consumers. No pipeline oriented business can compete with this vastly leveraged new form of competition.
2. From internal optimisation to external interaction:
Pipeline firms optimise a chain of product centric activities. Minimising the number of partners is a chief method of reducing costs.
Platforms create value by facilitating interactions between external producers and consumers. Using technology, platforms which are almost infinitely scalable, they produce scale at zero variable cost and minimal fixed cost. Unlike the ever diminishing network model of pipelines, platforms create an ever expanding network of partners and users. Pipeline companies take pride in reducing suppliers from 10,000 to 500. Platform companies scale up partners from nothing to hundreds of thousands in just a few months or years.
For Platforms the emphasis shifts from controlling and operating processes – an enormously expensive and effort intensive proposition which pipeline companies excel at – to helping participants create value through interactions and governing the ecosystem using technology leverage.
3. Customers Value to Ecosystem Value
Pipelines seek to maximise customer life time value of individual customers of products. Platforms maximise the total value of an expanding ecosystem of buyers and sellers. The cumulative value created by this complex interactive process exceeds the value a single producer can create with a small pool of customers even over the lifetime of the customer. This creates a virtuous loop. Scale generates greater value, which in turn attracts more participants, which in turn creates greater value.
The scale is referred to as Network effects. It accounts for Google’s 82% share of mobile operating systems and 94% of mobile search, Alibaba’s 75% share of Chinese e-commerce transactions and Facebook’s almost complete worldwide dominance of social platforms.
Rules of the game for Platform companies
- Create a strong upfront design that will attract the desired participants.
- Enable the right interactions – interactions that create value for producers as well as customers.
- Start with a narrow value focus. Test the value from the platform user’s perspective keeping volumes low. Scale up after receiving proof of concept. Facebook, for example launched with a narrow focus- Connecting Harvard students to other Harvard students. Next it targeted college students seeking connectivity with other college students. After that it was open to everyone.
- Platform governance is about deciding how open the architecture should be. Unfettered access can create noise. Chat Roulette paired random people around the world for webchats with no checks. The resultant noise created forced it to erect filters for access. Airbnb and Uber rate and insure hosts and drivers. Twitter and Facebook provide users with tools to prevent stalking, Apple’s App Store and Google Play Store filter out low quality apps.
- Platform’s must create their own metrics to track. Unlike pipelines which track costs and sales, Platforms monitor performance of core interactions. What is the percentage of occasions when an Uber customer found a vehicle or an Airbnb customer found a hotel room? What is the percentage of searches on Amazon that lead to a purchase? So it is not just how many customer and suppliers are on the platform, but how frequently the interaction led to a productive outcome.
- Create a fair system of rewards for suppliers. Rovio created the Angry Bird’s game on the Apple operating system, confident that Apple would not steal its IP. Zynga introduced the
game Farmville on Facebook without any fear of exploitation by Facebook. Platforms encourage producers to create high value offerings with no need to seek the platform’s approval, yet with the confidence that the platform will share the value thus created with the producer.
- Leadership Style: Pipeline leaders must shed their dictatorial control orientation if they have to transform into successful Platform companies. They must learn to be enablers, and not managers. When media boss Rupert Murdock took over social network Myspace he managed it the way he might manage the newspaper with a bureaucratic, control oriented top down approach and not as an enabling platform for creating value for participants. In time the Myspace community lost its ability to attract participants.
Threat to Pipeline Companies
Because Platform companies have learned the art of leveraging, they can migrate to almost any business vertical by on boarding a set of suppliers from the new vertical and leveraging the synergies of other verticals to create a completely new type of business. Google has moved from web search to mapping, mobile operating systems, home automation, driverless cars and voice recognition. In each of these verticals, it poses a threat to entrenched players who were once considered invincible.