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Platforms are the real powerhouses in Silicon Valley’s business landscape

TechCrunch TechCrunch 3/04/2016 Vivek Wadhwa

One of the most important lessons that Silicon Valley learned, that gives it a strategic advantage, is to think bigger than products and business models: it builds platforms.

The fastest growing and most disruptive companies in history — Google, Amazon, Uber, AirBnb, and eBay—aren’t focused on selling products, they are building platforms.

It goes beyond tech.  Companies such as Walmart, Nike, John Deere, and GE are also building platforms for their industries.

John Deere, for example, is building a hub for agricultural products. Platforms are becoming increasingly important as all information becomes digitized; as everything becomes an Information Technology and entire industries get disrupted.

A platform isn’t a new concept, it is simply a way of building something that is open, inclusive, and has a strategic focus. Think of the difference between a roadside store and a shopping center. The mall has many advantages in size and scale and every store benefits from the marketing and promotion done by others.

They share infrastructure and costs. The mall owner could have tried to have it all by building one big store, but it would have missed out on the opportunities to collect rent from everyone and benefit from the diverse crowds that the tenants attract.

Platform businesses bring together producers and consumers in high-value exchanges in which the chief assets are information and interactions. These interactions are the creators of value, the sources of competitive advantage.

The power of platforms is explained in a new book, Platform Revolution: How Networked Markets are Transforming the Economy and How to Make Them Work for You, by Geoffrey Parker, Marshall Van Alstyne, and Sangeet Choudary. The authors illustrate how Apple became the most profitable player in the mobile space with the iPhone by leveraging platforms.

As recently as 2007, Nokia, Samsung, Motorola, Sony Ericsson, and LG collectively controlled 90% of the industry’s global profits. And then came the iPhone with its beautiful design and marketplaces — iTunes and the App store. With these, by 2015, the iPhone had grabbed 92% of global profits and left the others in the dust.

Nokia and the others had classic strategic advantages that should have protected them: strong product differentiation, trusted brands, leading operating systems, excellent logistics, protective regulation, huge R&D budgets, and massive scale.

But Apple imagined the iPhone and iOS as more than a product or a conduit for services. They were a way to connect participants in two-sided markets — app developers on one side and app users on the other.

These generated value for both groups and allowed Apple to charge a tax on each transaction. As the number of developers increased so did the number of users. This created the “network effect” — a process in which the value snowballs as more production attracts more consumption and more consumption leads to more production.

By January 2015 the company’s App Store offered 1.4 million apps and had cumulatively generated $25 billion for developers.

Just as malls have linked consumers and merchants, newspapers have long linked subscribers and advertisers. What has changed is that technology has reduced the need to own infrastructure and assets and made it significantly cheaper to build and scale digital platforms.

Traditional businesses, called “pipelines” by Parker, Van Alstyne, and Choudary, create value by controlling a linear series of processes. The inputs at one end of the value chain, materials provided by suppliers, undergo a series of transformations to make them worth more.

Apple’s handset business was a classic pipeline, but when combined with the App Store, the marketplace that connects developers with users, it became a platform. As a platform it grew exponentially because of the network effects.

The authors say that the move from pipeline to platform involves three key shifts:

  1. From resource control to orchestration. In the pipeline world, the key assets are tangible — such as mines and real estate. With platforms, the value is in the intellectual property and community. The network generates the ideas and data — the most valuable of all assets in the digital economy.
  2. From internal optimization to external interaction. Pipeline businesses achieve efficiency by optimizing labor and processes. With platforms, the key is to facilitate greater interactions between producers and consumers. To improve effectiveness and efficiency, you must optimize the ecosystem itself.
  3. Value the ecosystem rather than the individual. Rather than focusing on the value of a single customer as traditional businesses do, in the platform world it is all about expanding the total value of an expanding ecosystem in a circular, iterative, and feedback-driven process. This means that the metrics for measuring success must themselves change.

But not every industry is ripe for platforms because the underlying technologies and regulations may not be there yet.

In a paper in Harvard Business Review on “transitional business platforms”, Kellogg School of Management professor Robert Wolcott illustrates the problems that Netflix founder Reed Hastings had in 1997 in building a platform.

Hastings had always wanted to provide on-demand video, but the technology infrastructure just wasn’t there when he needed it. So he started by building a DVDs-by-mail business — while he plotted a long-term strategy for today’s platform.

According to Wolcott, Uber has a strategic intent of providing self-driving cars, but while the technology evolves it is managing with human drivers. It has built a platform that enables rapid evolution as technologies, consumer behaviors, and regulations change.

Building platforms requires a vision, but does not require predicting the future. What you need is to understand the opportunity to build the mall instead of the store and be flexible in how you get there. Remember that business models now triumph products—and platforms triumph business models.

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