The platform concept is not new; it's actually been practiced for millennia. The traditional, open-air marketplace, such as a Middle-Eastern souk, is one such platform in which farmers and craftspeople sell their wares openly to consumers. The original stock markets were the same--buyers and sellers of shares would gather in person to establish fair market prices.
The difference between these traditional platform businesses and modern platforms is the addition of digital technology, which expands reach, efficacy, and convenience. Businesses engaged in digital platform models seek to leverage network effects--a phenomenon whereby a good or service becomes more valuable when more people use it. The car-service platform Uber is the perfect example, claiming a huge and growing share of the rides-for-hire market, displacing taxi and limousine services as a result.
However, Uber's disruption of its industry may only have just begun. In the upcoming MIT Sloan Executive Education program, Platform Revolution: Making Networked Markets Work for You (online), Geoffrey Parker, a Visiting Scholar and Research Fellow at MIT's Initiative for the Digital Economy, will suggest that the advent of self-driving cars may signficantly improve Uber's already stellar economic model and possibly lead to a series of cascading impacts. Might millions of people eschew car ownership altogether and instead rely on instantly available driverless vehicles? What would this mean for ancillary business, such as automakers, auto insurance, or even parking?
Platforms eat pipelines
There is no question that the Internet transformed the world of business, most notably by replacing inefficient pipelines with efficient ones. Traditional media companies, for example, were upended by the Internet's ability to distribute news without the traditional pipeline of printing, shipping, and retailing. Retail stores and mail order shopping were next--many brands were eclipsed or revolutionized by online distribution models. Now enter the platform, where the Internet no longer acts merely as a distribution channel but as a creation infrastructure.
The platform model is further bolstered by the Internet's ability to connect and coordinate objects in the real world. Known as the internet of things (IoT), this additional capability enables you to control your home appliances via your smartphone, for example. Virgin Atlantic is investing in the internet of things by making a fleet of Boeing 787 aircrafts and cargo devices connected with IoT devices and sensors. Fitness First has invested in iBeacon technologies to track who exactly is entering their gyms and to send relevant information to them automatically. UPS uses IoT sensors to reduce its impact on the environment by monitoring its mileage, optimum speed and overall engine health. Organizational boundaries are being redefined as platform companies leverage external ecosystems to create new forms of value.
In this new world order, platforms enjoy two significant advantages over pipelines:
- Superior marginal economics of production and distribution: Positive network effects enable expansion and the ability to scale. More freelancers participating in Upwork, for example, make it more attractive to companies looking to hire, which thus attracts more freelancers, etc. This feedback loop fuels growth at minimal cost.
- Access to resources: These ecosystems can be larger than most pipeline-based organizations (compare a hotel chain to the number of available beds on Airbnb) and can have far greater access to resources. Firms reliant solely on internal resources are finding it harder to compete.
Reconfiguring familiar business processes
The rise of the world of platforms is creating change in almost every aspect of business, in particular value creation, value consumption, and quality control.
- Value creation: Platforms open up new and growing sources of supply. Singapore-based video-streaming platform Viki leverages enthusiasts (instead of employees) to add subtitles to Korean and Japanese dramas, which are then marketed to the U.S. (Viki was sold to the Japanese company Rakuten for $200 million.) Facebook used a similar approach to find translators for its website.
- Value consumption: Platforms have changed consumer behavior seemingly overnight. We are hopping into strangers' cars, sleeping in their spare rooms, dropping off our dogs at their homes. Platforms have not only capitalized on the enterprising nature of individuals, they have created an ethos of trust among strangers that was formerly unimaginable.
- Quality control: The early stages of YouTube, Wikipedia, and Airbnb were murky, as they failed to assure the level of quality provided by their competitors. However, over time, the mechanics of curation--socially driven feedback loops--result in higher and higher quality of content/goods/services. Undesirable behavior is eventually (mostly) weeded out.
Transforming the structure of the business landscape
Ask Geoffrey Parker, co-developer of the "two-sided market" theory, for additional forms of platform-driven disruptions and he will point to three that he considers to have largely gone unnoticed.
- Delinking assets from value: De-linking ownership of physical assets from the value they create allows the assets to be independently traded and applied to its best use/greatest economic potential. For example, a hospital may only use 40-50% of its own MRI capacity (each MRI machine costs $3-5 million). The solution: create a market for MRI usage among other local hospitals and clinics that cannot afford their own machine, producing incremental value for the machine's owner.
- Reintermediation: While it was long predicted that rising Internet technologies would abolish the middleman in favor of direct connections between producers and consumers (disintermediation), the reality is somewhat different. Across numerous industries, platforms have reintermediated markets, using market-mediating mechanisms that scale. And they gather data while they do it, resulting in smarter systems.
- Market aggregation: Platforms provide centralized markets by aggregating disorganized ones. Take, for example, redBus in India, which is solving the fragmented transportation system by aggregating information from all Indian bus operators into the largest online bus tickets platform in the country. Or Etsy, an online site where thousands of vendors from around the world can sell their wares.
Are pipeline businesses doomed?
Can the incumbents fight back? Sure they can. But to fight the forces of platform disruption, they'll need to reevaluate their existing business models, scrutinizing their transaction costs, for example, and finding ways to reduce them. They'll also need to examine the universe of individuals and organizations they interact with and envision new ways of networking them in order to create new forms of value. If the company can use either information or community to add value to what it sells, then there is also the potential they too can join the platform revolution.
Learn more about launching a platform model from Geoffrey Parker
Platform Revolution: Making Networked Markets Work for You (online) is a new, four-week program at MIT Sloan Executive Education, in partnership with the Initiative on the Digital Economy (IDE) at MIT, that introduces participants to the many ways networked markets are transforming the economy and provides strategies for designing, monetizing, and launching a digital platform. Combining rigorous theory with real-world experience, this program is presented as a digital toolkit of weekly live webinars, recorded video lessons, presentations, and exercises released weekly that you can access however and wherever works best for you. Topics include platform startup, converting existing businesses, openness, network effects, innovation, cannibalization, pricing, governance, and competition. Read more about this new course.
This blog post was adapted from content provided in Platform Revolution: How Networked Markets Are Transforming the Economy--And How to Make Them Work for You, authored by Geoffrey Parker, Marshall W. Van Alstyne, and Sangeet Paul Choudary.