Platforms are the dirty little secret of many hyper growth businesses

Platform businesses, such as eBay, Google and Facebook have been booming over the past few years.  More recently firms like Twitter, Airbnb or Etsy have further confirmed the potential of these new, ecosystem driven, business models.

In fact the value created by platform businesses, be it for shareholders or society as a whole, in the past 10 years or so is unprecedented[1]. Three out of the five largest firms in terms of market capitalisation in the world (Apple, Google and Microsoft[2]) run platforms, four out of the top five brands in the world (Apple, Google, Microsoft and IBM) have businesses underpinned by platforms[3] and the majority of so called unicorn businesses[4], VC funded over the past 10 years and now valued at more than $1bn, can be described as platforms.

Platform businesses are powered by unique economic drivers

• They are not linear “input/output” firms but complex ecosystems

Traditional businesses have a linear mode of operations. Some inputs are purchased (e.g. raw material, energy, services…) and subsequently transformed and sold at a margin to target customer groups. This is the mainstream paradigm that can still be found in many traditional businesses as well as in most business books, management programmes and case studies.

Platform businesses are different. They create value by attracting different sets of customers, matching them, connecting them and allowing them to transact. They enable and facilitate transactions (think market places such as eBay with sellers and buyers, app stores matching apps and users, etc.).

The platform dynamics and interplay between customer groups is often complex. Intervention on one side of the platform (be it a pricing, marketing or product decision) can have far reaching consequences on the other side of the platform and the overall ecosystem. eBay’s mandated free shipping policy for some product categories is an example of such difficult decisions (that increases the costs on the sellers’ side of the platform) with a strong positive effect on the consumer side and generating an overall positive effect for the platform (increased sales or so called Gross Merchandise Value). Internalising these, often political, decisions is at the heart of the platform governance and requires systemic thinking.

• They benefit from positive externalities & network effects

For example, when you search on airbnb for a place to rent, you benefit from comments posted by other guests (positive externality[5]). The more places available to rent, the more useful the service for prospective guests (network effects[6]).

• Once a critical mass has been reached growth trajectory is self-sustaining (for a while!)

Airbnb needs to attract enough people on both sides of the platform (hosts and guests) in key locations in order to be viable and reach critical mass. Airbnb is a great company but this has a lot to do with the fact that they have now reached a critical mass… an airbnb with only one flat would be significantly less attractive!

Platforms can grow exponentially but also unravel if the ecosystem is not strong enough. Examples of spectacular downfalls include Alta Vista or more recently RIM/Blackberry.

Platforms often feed powerful ecosystems

Of course the world is not split between pure platforms and traditional businesses. In fact many firms adopt hybrid business models to enshrine the value of platform businesses at the heart of a complex ecosystem that also include some more traditional activities. Business models also morph over time, and may start as a platform or evolve into one after having experimented with other constructs.

Apple manages platforms around its operating system OS X and its app stores, uses a value added resale model for iTunes and runs a more traditional global hardware business for its computers and phones. These various parts are however reinforcing one another and creating a formidable ecosystem that is valuable, rare and difficult to replicate: the very definition of a competitive advantage. The market place of Amazon, combined with its own distribution activities, hardware offering and cloud based web services also require an ecosystem approach to be fully understood.

What is becoming increasingly clear however is that traditional management models and frameworks need to be revisited to capture unique economic characteristics of these platforms and associated ecosystems.

Yet many questions remain…

• Why have platform businesses been so successful compared to traditional business models?
• What are the different kinds of platform businesses out there?
• What are the underlying economics of such businesses?
• What are the new strategic and management principles that can be developed to best support the success of such businesses?
• How to successfully manage emerging platforms and mature ones?
• How to reinvent management for platforms and ecosystem based businesses?
• What are the pitfalls to avoid and key challenges to overcome?
• What does the future hold?

We will try to shed some light on these tricky questions over the next few months…