What example of a platform based business model would airbnb and uber represent.

Besides multibillion-dollar valuations, what does Netflix, Airbnb, Alibaba, Uber, Amazon have in common? None of these companies directly create the value which their users consume, still, they are among the top business organizations.

They all operate with a different business model, called: Platform. 

Digital platforms provide the foundation for game-changing solutions. They are driving the digital economy and accelerating the transformation of many companies. Looking back over the past 60 years, 85% of Fortune 500 companies are no longer in business, and more than 60% of the top 10 most valuable companies globally are based on a platform business model, thanks to the digital economy and the accelerated pace of change. Whether we look at the start-ups like Uber, Airbnb, Netflix, Instagram, YouTube, Waze, Lyft, Pinterest, GitHub, Kickstarter, Didi Kuadi, and more, which are disrupting traditional markets, or the established companies that have shifted their business model from a pipeline approach to a platform-based approach, platform businesses are in the news everywhere. The platform revolution is offering an opportunity to develop an entire ecosystem of value, spanning the digital and physical worlds.

Apple & Google defeating Nokia and BlackBerry in the mobile business, Netflix beating down Blockbuster in movie rentals, and many more brick and mortar retailers closing down due to competition from online retailers like Amazon & eBay are some of the well-known examples of platform-business-model taking over pipeline-business-model.

The top five companies by market cap are all platforms.

Whether you’re building a platform business or not, you can’t succeed in today’s economy without understanding how platforms work, so companies in all industries, including communications, media, and technology, production, infrastructure, want a piece of the platform revolution. This brings us the question

What is Platform-Business-Model?

A platform is a business model that creates value by facilitating exchanges between two or more interdependent groups, usually consumers and producers. It focuses on helping to facilitate interactions across a large number of participants, to achieve a shared outcome or sustained efforts to accelerate performance improvement. It enables the users to add value to the platform and engage in beneficial transactions. Interestingly, the platform providers are not the actual producers of the product or services in the business which customer consumes, and the key feature of any platform business is its ease of use.

The platform economy is economic and social activity facilitated by platforms.

For example, TV Channels are the Pipe model but YouTube is a Platform model. Encyclopedia Britannica was a Pipe model but Wikipedia is a Platform model. Hilton is a Pipe model, but Uber, Lyft, Ola, are Platform model. Now you see that the platform models are becoming omnipresent and casting their shadows in the traditional pipeline models.

Platforms represent a big change in the way industries have traditionally been organized. A platform ultimately enables this value creation by facilitating transactions, and the organizations move from offering a product to creating an ecosystem for those interactions to take place. While a linear or pipeline business creates value by manufacturing products or services, platforms create value by building connections and manufacturing transactions. The classic example is Uber, it provides the interactions on-demand like if I want to drive from my home to office, I can look for Uber app in my mobile to find a car to drive me along, nearby Uber car drivers get notified and one of them serves my request to drive me along. I get the ride with the agreed fare without waiting time and without fare discussion with the drivers, and drivers get the commuters without any struggle to look for the people wanting to get the ride. Uber does it without owning even a single car on its own.

Key Success Factors

• Ease of registering and becoming a user
• Attractiveness (or benefits) of using the platform
• Smooth flow of interaction amongst the users.

Some pioneering companies are already evaluating how they can participate in existing ecosystems. A few companies are pursuing more valuable ecosystem leadership roles, but most are still trying to figure out the role that is right for them. First mover advantage is important in an environment where the winner often takes all, hence those that wait too long face the risk of being marginalized, but the race is still on, is not totally lost for the companies who have not been part of the platform economy. They still have a chance to create their own platforms, or, to leverage other platforms to their advantage, by being part of other platform’s ecosystem. While ecosystem leaders stand to gain more in the long run, both roles allow communications, media, and high tech companies to build offensive positions by delivering differentiated experiences, as well as defensive positions by avoiding commoditization.

A lot of established companies are struggling with how to leverage the digital platform and ecosystem models for their industries. They are trying to figure out how to create a core platform that will deliver on the promise of exponential growth. The rules of the game have been changed with the platform model, and they need to learn how they can play in this new world of ecosystems which requires a completely new way of collaborating with partners, customers and competitors.

With the platform ecosystems, a huge portion of the power is shifting to ecosystems, hence the companies need to understand the platforms and figure out their place in this new competition model. They can either establish their own platforms or participate in an existing ecosystem. Whatever their role be, either participating in some and leading in others, the value they can deliver to others, and generate for themselves, within an ecosystem depends on the role they play in the platform.

There is a shift from pipeline (traditional) business models to platform (ecosystem) business models. Unlike pipes, platforms do not just create and push stuff out. They allow users to create and consume value. At the technology layer, external developers can extend platform functionality using APIs. At the business layer, one type of users (producers) can create value on the platform, for the other type of users (consumers) to consume.

This is a massive shift in the form of business, which means:

• The shift from Resource Control to Resource Orchestration

In pipelines, the resource-based view of competition holds that firms gain an advantage by controlling scarce and valuable, ideally, inimitable assets. Such as tangible assets like real estate, advanced types of machinery, and intangible assets like intellectual property.

While in platforms, the assets are the resources owned & contributed by the community and its members. E.g. Ideas, information, cars, or rooms, which means that the network of producers and consumers is the primary asset in the platform model.

• Shift from Internal Optimization to External Interaction

Pipelines organize their internal labor and resources to create value by optimizing an entire chain of product activities, i.e. from materials sourcing to sales and service. While Platforms create value by facilitating interactions between external producers and consumers. The emphasis shifts from dictating processes to persuading participants and ecosystem governance become an essential skill.

• The shift from Focus on Customer Value to Focus on Ecosystem Value

Pipelines focus on maximizing the lifetime value of individual customers of products and services, who are at end of a linear process. While, the platforms focus on maximizing the total value of an expanding ecosystem in a circular, iterative, feedback-driven process. It means that sometimes it is a higher value to subsidize one type of consumer in order to attract another type.

"There is no alternative to digital transformation. Visionary companies will carve out new strategic options for themselves, those that don’t adapt, will fail."

- Jeff Bezos.

Primary roles in Digital Platform Ecosystems

There are three primary roles: 

• Ecosystem Orchestrator
• Modular Producer
• Consumer

Ecosystem Orchestrator

These companies connect various stakeholders and create shared value for the community. They take on the risk, complexity, and challenges of supporting stakeholders. They enable others to make and sell goods and services through the ecosystem.

E.g. Amazon. It provides the platform and server as orchestrator between the seller & buyer.

Modular Producer

It produces value and monetizes the value it generates in the ecosystem.

E.g. PayPal. It provides financial services used in multiple digital ecosystems. Its core service can meet the needs of buyers, sellers, consumers, and businesses.

Consumer

It extracts value from an ecosystem. A consumer can be a person or an enterprise. E.g. When you pay for an Uber ride, you are a consumer in the transport ecosystem that Uber has orchestrated. Consumers can also be producers. The company that bought goods at Amazon can sell them on the online marketplace next week. Both are ecosystem stakeholders.

Network Effects

The pipeline businesses gave advantages to companies with higher control over the assets and types of machinery. The goal of strategy in this world is to build a moat around the business that protects it from competition and channels competition toward other firms. Pipeline business was supply-side economies of scale. Companies with low marginal costs achieved higher sales volume than their competitors and had a lower average cost of doing business. It allowed them to reduce prices, hence increased sales, thus reducing prices even more and gaining a higher share of markets.

The driving force behind the platform business is demand-side economies of scale, also known as network effects. The network effect is a phenomenon whereby increased numbers of people or participants improve the value of a good or service. The easiest example of a network effect is the Phone. When only one person had a phone, the value of the phone network was zero, because this person could not do anything with the network. A Phone became only useful when other people also owned a phone. When multiple people owned a phone, then they could call the other persons, and it brought value to the network. As the number of people owning phones increased, the value of the network got multi-folded. The same is true for the social networks, and the same concept works in the new platform business model.

In the Platform business, the network is higher worth than tangible assets. The companies that attract more platform participants offer a higher average value per transaction. Larger the network, the better the matches between supply and demand, and the richer the data that can be used to find matches. It creates the virtuous feedback loop, higher participants (volume) generates more value, which attracts more participants, which creates more value.

Alibaba, Google, Facebook, Uber, Airbnb, Netflix are some of the well-known examples of network effects which have developed their dominance in e-commerce, mobile operating systems, social platform respectively.

Ecosystem Leadership

There are three types of ecosystem leaderships: 

The Aggregator

Aggregators create transactional marketplaces that connect supply and demand. Their platforms offer a frictionless exchange of value between customers and suppliers. Suppliers pay for the opportunity to access the single marketplace. Success is dictated by the volume of buyers and sellers, as well as the ease with which transactions can be carried out.

E.g. Alibaba, eBay, Amazon 

The Innovator 

Innovators create platform environments that enable the development of new solutions. Innovators enable and encourage third-party developers to create the services and solutions customers want or need. They establish and enforce governance models. They continually update the platform architecture to make app development easy and cost-effective. 

E.g. Google, Apple

The Orchestrator

Orchestrators create platforms that drive exceptional customer experiences. Orchestrators define the reference architecture for ecosystem participants. They collaborate with their partners to co-create and integrate a set of services that address business issues and deliver valuable outcomes. They ensure they are delivering differentiated customer experiences.

E.g. Google, Uber, Netflix

Rules of Business have Changed

In pipeline businesses, Porter’s five competitive forces (i.e. the threat of new entrants, the threat of substitute products or services, the bargaining power of customers, the bargaining power of suppliers, and the intensity of competitive rivalry) are relatively defined and stable. The customers and competitors are fairly well understood, and the boundaries separating your suppliers, customers, and competitors are reasonably clear.

In platform businesses, those boundaries are getting blurred and can shift rapidly. The boundaries are fluid. Here, not only these five competitive forces work differently, but also new factors like the Network effect come into play, which makes the competition is more fierce, complicated, and dynamic. The traditional utility business model is being challenged, placing them under immense pressure to innovate.

"At least 40% of all businesses will die in the next 10 years, if they don’t figure out how to change their entire company to accommodate new technologies."

- John Chambers, Cisco Systems.

The participants can play multiple roles in the ecosystem, they can play in multiple ecosystems, creating a business model portfolio. E.g. Apple makes computers & phones, as well as hosts Appstore for third-party applications. Google is a search engine as well as a mobile operating system & Appstore, and many more.

Platform participants; consumers, producers, and providers, typically create value for a business. But they may defect if they believe their needs can be met better elsewhere, or they may turn on the platform and compete directly with it.

The new roles that players assume can be either accretive or depletive. Producers and consumers can swap roles, or the partners can build their own platform and can become competitors. The platform companies must constantly encourage accretive activity within their ecosystems while monitoring participant's activity that may prove depletive. 

Examples include;

Uber: Users can ride with Uber today and drive for it tomorrow (roles can be swapped).

Airbnb: Travelers can stay as customers one night and serve as hosts for other customers the next time (roles can be swapped).

Zynga: It started as a game developer on Facebook but then developed its own platform and migrated players of Facebook onto its own (partners can become competitors).

Rules of Business have changed, Play by the rules, but be ferocious.

While developing their ecosystem strategy, companies need to identify the ecosystem, in which their company must play a role. You need to identify which roles you should play in relevant ecosystems. You also need to identify how to monetize your role in the ecosystem. These things were straightforward for a pipe business. Similarly, in simplistic terms, Price can be calculated as the sum of cost and margin, i.e. Price = Cost + Margin.

While these things are pretty complex in a platform business. You need to identify your partners and customers, and where the emerging threats and opportunities lie. In a really connected world what a platform business does is to optimize supply and demand between the producers of certain goods and services and consumers. It orchestrates those interactions and makes them more efficient. To be an ecosystem orchestrator, a company must have, or build, a platform that creates large network effects. You need to identify the right strategy to engage both the side of players so that the business still remains feasible.

An ecosystem modeling exercise allows an organization to articulate exactly how it captures value from their participation. The value does not necessarily have to be revenue; information flows and intangible value can be just as important. Platform economics isn’t quite very straightforward.

"The biggest part of our digital transformation is changing the way we think."

- Simeon Preston

Concluding Remarks

The platform economy is reshaping global trade. We are moving from linear to networked business models, from pipes to platforms. Small and medium-sized business trade is on the rise globally, driven by the platforms like Alibaba, which allow even smaller producers to participate in global trade, without investing in their own supply chains. In the coming years, every company will become a cloud or digital company. All businesses will have to move to this new model at some point, or risk being disrupted by platforms that do. As Hastings said, “Companies rarely die from moving too fast, and they frequently die from moving too slowly.” The Platform players need to determine whether they will lead or participate in each ecosystem opportunity they are considering. They may opt to participate in one ecosystem as a component supplier while serving as an innovator in another. Such decisions require an assessment of the value they can bring to the targeted ecosystems.

As the platforms require new approaches to strategy, they also demand new leadership styles. In the words of Simeon Preston, "The biggest part of our digital transformation is changing the way we think". The skills it takes to tightly control internal resources just don’t apply to the job of nurturing external ecosystems. Business leaders who understand this will likely increasingly seek out platforms that not only make work lighter for their participants, but also grow their knowledge, accelerate performance improvement, and hone their capabilities in the process.

In digital world, when it is not the big fish that eats the small fish, but the fast fish that eats the slow one.

- Klaus Schwab (founder and chairman of World Economic Forum)

Pipeline businesses must also learn the new rules of the game for a platform world or plan for their exit. As Jack Welch rightly said, “When the rate of change on the outside exceeds the rate of change on the inside, the end is near”. So, Is your Organization changing fast enough?