The Rise of the Platform: A seismic shift in business models

| October 19, 2013 | 24 Comments

Note: A variation of this article appeared as an op-ed on The Wall Street Journal’s MarketWatch. This was co-authored with Geoffrey Parker (@g2parker, Tulane Univ.) and Marshall Van Alstyne (@infoecon, Boston Univ.). They currently serve as research scientists at the MIT Sloan School of Management.

 

Nokia just sold to Microsoft. Blackberry announced that it is considering putting itself up for sale. Google’s Android, meanwhile, grows stronger and is moving beyond smartphones to power cars, home electronics and wearable accessories. Twitter’s heading for a strong IPO with the world’s strongest platform for influence and dissemination. While Barnes&Noble is parting company with the Nook and struggling to survive, 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.

 

Platform Disruption

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. We are in the midst of a seismic shift in business models, powered by the Internet and a generation of connected users.

Business leaders, today, develop platforms that connect diverse participants with one another and enable them to interact and transact. On the Internet, anyone can be a producer. Today’s network platforms aid the creation of entirely new markets by connecting producers and consumers with each other.

Three forces are powering the rise of platforms: ubiquitous network access with ever-increasing 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.

 

Three factors driving disruption

We predict three factors will drive this 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 is rolling up unconnected and unaffiliated restaurants. RedBus, the world’s largest bus reservation platform, gathers India’s fragmented bus schedules and reshapes 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.

 

The new rules of a platformed world

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.

 

Threats to Platform Innovation

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 for a time.

 

So what should you do to thrive in a Platformed world?

Will you be the disrupter or the disrupted? To act on platform opportunities, consider the three factors transforming industry and embrace them:

Remake the role that experts play inside your business to leverage user capabilities outside your business. Build social curation and reputation systems to employ the collective intelligence and judgment of your users.

Connect consumers to their best product options, regardless of source, through data-driven matchmaking.  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. The value would be enormous.

Finally, solve a consumer problem in your industry by marshaling spare resources. If you’re in transportation, build systems that employ other people’s trucks before expanding your own fleet.

 

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. 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.  But, for those willing to open their ecosystems and aid their consumers, the future looks bright indeed.

Welcome to the Platformed world!

 

Tweetable Takeaways

Platforms disrupt gatekeepers, create new sources of value and aggregate fragmented markets. Tweet
In a platformed world, leverage user capabilities outside your business. Tweet
In a platformed world, solve consumer problems using spare resources. Tweet
Image Credits: Creative Commons/Flickr

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  • Brian Baum

    Greg,

    Perhaps we should talk. I’ve shared some of our approach with Sangeet
    and he seems intrigued. Healthcare is clearly a fertile field for innovation, however, as we all know, anything other than med tech seems to lag the rest of the business world. My focus is on “data”. To be specific, individual/identified data, (data that matters to health and quality of life of a single individual.) The individual generally pays no attention to their personal health data, in many cases they do not have ready access and certainly are not managing it through apps that may trend changes in health metrics and project outcomes and alternative paths to mitigate risks. But consumers do engage with a multitude of apps that manage other facets of their lives – financial/wealth management being just one example; fantasy football being another.

    A barrier to “intelligent” apps in healthcare is the connection of personal health data with the app. Short of consumer manual input of health data
    into an app there is no simple way for a consumer to authorize the transfer of appropriate health data to third parties that can create value from the
    data. If a consumer makes a purchase decision on say an activity monitor, perhaps they’d also like to see how their cholesterol values, or blood pressure changes/improves based on their increased level of activity. Would it be helpful/valuable to the consumer to see that their level of activity that they are so focused on monitoring is actually improving their health in a measurable way? Of course, apps like this are just the tip of the iceberg if data more efficiently flowed in healthcare. (Better outcomes,
    enhanced consumer experiences and reduced costs, just a few of the more
    profound benefits. To say nothing of aggregating de-identified data across
    population segments.)

    I’ve merged platform thinking/online marketplaces with the world of health data. My company is creating a health data marketplace ww.vitaTrackr.com
    . Think of it as an industry utility. All we do is facilitate the flow of health data from source to destination; or to put it another way – from
    seller to buyer. (Functional markets drive behavior; mandates drive resistance.)

    This is a “big idea” that is supported across many sectors of the
    industry. We’re banking on the network effect to scale this model very quickly.

  • Mark Paddenburg

    thanks – great insight and very well articulated

  • http://platformed.info/ Sangeet Paul Choudary

    Thanks Peter, I’m glad you liked it. All the best with your startup! :)

  • http://platformed.info/ Sangeet Paul Choudary

    Thanks Govind! Appreciate the kind words.

  • Peter Ching

    Just wanted to say thank you again for such an insightful post. I’ve been following your blog since the beginning of the year to work through my own business model for MoreTheMerrier.com, an events & rewards platform connecting promoters with their audience. Looking forward to the book in the new year.

  • http://platformed.info/ Sangeet Paul Choudary

    Thanks Josh! REally glad you’re enjoying my work. Great point! I need to think more about that. I do feel today’s platforms aare more than just transfer networks, they are also creator networks. But definitely would love to think more about this.

  • http://www.santafeway.com/ Jeff Nailen

    I had not, so thanks for this Sangeet.

    Keep up the great work. I think you are on the very leading edge of a huge paradigm shift in business strategy, the first truly emergent business model of the Information Age.

    We live in exciting times.

    Cheers,
    Jeff

  • Govind Rao Adapa

    This is a useful attempt to make one understand the business sense to balance the efforts to adjust, adopt and aspire success. Well done service to community at large.
    The lessons worth emulation.

  • shrock

    ha a troll? that’s very drole. you’ve clearly got a thing about platforms (and a book to sell) but are you seriously equating msoft, google, appstore,,etc with uber, airbnb?? are they al platforms that we really can’t live without. I think not.
    “We’ve got to figure who creates value and who we charge for that.” but you left out “& when we can exit”. I don’t really care what you call them or what value they pretend to produce, disrupting existing services with new middlemen is just VC crack. after all waving your arm in the street ain’t really that hard, is it? and just think how many real jobs a quarter of a billion dollars could produce. now that’s value.

  • http://www.businessmodeldynamics.com/ Josh Blandy

    Hi Sangeet,

    I’m a recent subscriber to your list and posts like this are one of the reasons I subscribed.

    I think we are early in the evolution of platforms and it will be interesting to see how they evolve. One of the challenges I think they will have is whether they can become too successful and suffer the fate similar, for example, to that of telecommunication networks and be viewed as utilities, and/or lose pricing power within their own value chains as more ‘value adding’ propositions are built on top of them.

    Look forward the book!

  • http://platformed.info/ Sangeet Paul Choudary

    Gregg, thanks for this super-rich comment Love all the points you mention here. Healthcare, both from a collaboration flow perspective and a market connection perspective is waiting to be transformed by platforms. I look forward to continuing discussions with you on this topic in the days ahead.

  • http://platformed.info/ Sangeet Paul Choudary

    Hmm.. Clearly you haven’t heard of Microsoft, Google, Facebook, Paypal, Android and the iPhone App Store. I frankly don’t care about whether a particular platform is worth something or not. The larger point is that in a connected world, platforms are the natural way to organize business. You’re clearly missing that point in your effort to pull down specific company valuations.

    Clearly, one look at your Disqus history confirms you’re a troll!

  • shrock

    it definitely requires a serious answer if you think you can justify uber being worth >$1b cos we’re all too lazy to wave our arms anymore.( oh and so well off that we don’t mind paying more or taking money out of the service providers pocket)
    you’re not really suggesting that the conditions in Brazil/Mexico exist on the ground in nice warm safe SF, NY, London, etc are you?

    like I said VC crack.

  • Armodios Stasinopoulos

    I am not sure your mindless dismissal requires a serious answer, nevertheless, here is an article describing how a platform similar to Uber’s creates value for both its users and providers while the reputation system changes the whole industry’s quality offering. http://techcrunch.com/2013/07/15/taxibeat-mexico/

  • shrock

    What nonsense. Most platform plays are just VC crack. They create value only for investors, disrupt markets that don’t need disrupting and become the new gatekeepers. Uber Shmuber http://wp.me/pBF84-3h via

  • Gregg Masters

    Bravo. Am thinking of the h/c disruptor equivalent? so far there’s no innovation in the financing and delivery sector other than the continuation of the cost shifting charade from payors to beneficiaries albeit disguised as ‘empowerment’ plays via high deductible [or consumer directed] health plans. Bogus argument and mere testimony of the collective failure of the health plan community to underwrite, price and effectively manage clinical risk let alone track with CPI trends.

    two likely contenders are direct practice (retainer or membership medicine, eg, Qliance, Iora Health, or Paladina health though their traction in the market remains anemic to date, and retail medicine via Minute Clinics and their kiosk like extensions see Solo Health as an example.

    While both add value at the niche market level, neither do little to impact the root causes of the ‘dis-ease’ of the healthcare borg, nor offer mainstream solutions to the underlying dysfunction of a costly, variable and in accessible care delivery model.

    very thoughtful piece!

  • http://platformed.info/ Sangeet Paul Choudary

    Thanks Tushar! Fantastic to hear that. Do keep me updated on how things progress and all the best!

  • Tushar Jain

    I just wanted to let you know that your writing has been inspirational and very helpful to me in my startup. We are building a platform to connect physicians with information about new treatments and then help the physicians connect their patients with those treatments, your writing about how to build and manage these types of platforms has been valuable in the process.

  • http://platformed.info/ Sangeet Paul Choudary

    In the meantime, I’ve compiled my best essays and some additional material in an actionable sequence as an ebook. You should definitely get that if you haven’t already: http://platformed.info/platform-thinking-concepts-ebook

  • http://www.santafeway.com/ Jeff Nailen

    Thanks for the update. I look forward to both books!

  • http://platformed.info/ Sangeet Paul Choudary

    Thanks Jeff!

    I actually want to put up a post about the book soon but here’s the short download. The original plan was to have it out this year BUT halfway through, I started a very interesting collaboration with Marshall and Geoff, my co-authors above, with whom I am now co-authoring the book. That book is going to aim the mass market.

    But I have refocused and am writing a second book in parallel, focused at entrepreneurs and builders… less on stories, no fluff, highly visual and very actionable. That’s the one I will be giving to the blog readers and is called Platform Thinking. I also plan to have that as the first in a series of actionable books that come out.

    So the Platform Thinking book is expected to be ready early next year. The co-authored book will take longer, going through the traditional publishing route. Probably by mid-late next year.

    I’m writing a post on this soon, also inviting co-creators for the initial book but thanks for asking.

  • http://platformed.info/ Sangeet Paul Choudary

    Thanks!

  • http://www.santafeway.com/ Jeff Nailen

    Excellent, as always, Sangeet. Looking forward to your new book. When is it expected?

  • StockTree

    Great post!!