What about a platform business?

October, 2018

One of the most striking subjects or themes that have cropped up at board level in recent months are platforms. Driven by the great success of Uber, Facebook, but also Alibaba, Amazon and Spotify, every company we speak is actually exploring or developing a platform. But what drives this development and why should you care?

To start with the latter, let’s consider the facts. In 2015 the total growth of the number of platform companies worldwide was 176 of which the US and China accounted for 146. The total market cap of these companies accounted for 4.303B USD and the total of employees working for these companies counted up to 1.300 million. So there is definitely a business opportunity there, and more importantly we are lacking behind as Europe.

 

If we think you should care, the other thing is to understand what is driving these business. We belief the Big Shift[1] and the two dominant motives, exponential growth of technology on the one hand and the globalizing landscape on the other, ensure that barriers to gain access to knowledge and production resources, new markets and commercial success and financing are disappearing[2]. As a result, we see that new business practices such as crowdsourcing or flexible labor relations, crowdfunding, gamification, DIY and peer-to-peer practices are increasingly being applied. It is relatively simple and with limited risk to aggregate resources and knowledge from your living room, make them available and finance them through crowdfunding. Our experience is that for business this is often not common practice, but often takes the form of experiments or projects. This while it is the way for startups and scale-ups to quickly develop scale and relevance in the market and is also the basis of the success of platform business models.

 

What this creates is a strong change in the structure of many markets. On the one hand, we see a stronger fragmentation with many niche operators who can build a healthy business through these new practices (a good example is Uber) and on the other hand the need for concentration where scale is still desirable (telecom infrastructure or web services for example). The question that therefore occurs among many corporates is that of scale vs. scope and therefore what roles are necessary to be successful in these changing and growing markets[3]

 

Unraveling platforms

The Center for the Edge has done a lot of research on platforms, its manifestations and in particular the critical success factors. First of all, let us conclude that various types of platform businesses can be distinguished: from the best known aggregation (the marketplace) and social (facebook, instagram) to lesser-known platforms aimed at mobilizing resources or assets and platforms aimed at faster learning. Looking back at the more successful but also less successful platforms, we can conclude that a platform is much more than a technical solution to solve friction in the physical environment with IT. In our view, a platform is a business model that evolves as it shows more growth and success and is therefore capable of scaling in multiple dimensions and also becomes a mix of the different types of platforms. We do see, however, that in almost all cases a business platform starts with aggregation of supply and demand in a domain where there is sufficient friction that up to that time was not solved with traditional products or services.

 

As a result of the greater market dynamics, higher uncertainty and increasing complexity, the pressure on companies to choose which role they can successfully fulfill. As mentioned, there is limited space for real scale operators for the necessary physical or digital infrastructure, but on the other hand there is a lot of growth and diversification in scope drivers such as vendors and agents. In a platform business, the platform owner or orchestrator is the one that facilitates interaction between them. The platform orchestrator is a relatively new role that is desired (and therefore of value) to connect the fragmented supply and demand in a successful way, facilitated by a seamless working infrastructure (physical like DHL) or digital like Microsoft. As the scope and scale of the platform grows, the need arises for agents or trusted advisors who assist both vendors and users in identifying those services and products that suit the demand and supply.

 

In addition to typing and rolling, it is important to understand the dynamics on the platform and to know what the different parties need to be and remain successful. Often, the role of governance is overlooked as a crucial facilitator of scalable interaction. With governance this means the rules of the game. If we take Uber again as an example, we see that because of the rating system and the positive and negative incentives that emanate from it, behavior is automatically enforced. Drivers will benefit from a high rating and therefore focus on the end user and the maximum service of his or her wishes. This ultimately benefits the quality and service of the beneficent. Let us use an example to illustrate this.

“An Uber driver in Amsterdam once told me that he normally never accepts a ride request from customers from Asia… the reason for this was that these customers most often expect a BMW or Mercedes when they order a taxi and he drove a Renault. Nothing wrong with that but the chance that he would get 4 or 5 stars is relatively small”

 

The example above illustrates, in my view, how a fairly simple rating system leads Japanese to get what they want in this case and that the supply focuses on the right demand and is therefore not only a mass product but also allows customization. In addition, the incentive has shifted from purely transactional (old taxi model) to more long-term right of existence and customer satisfaction.

 

Good governance is important on platforms as there is often limited central control (as traditionally in a value chain) and the number of active parties so large that central coordination is almost impossible. The governance determines to a large extent how the various parties deal with each other and to be able to accommodate this in the case of strong mobilization of resources or assets (such as Spotify, BlaBla Car, Alibaba). Elements in the governance include the use of smart incentives and gamification to automatically instigate participants on the platform to drive network effects and increased convenience for marginal additional costs. Convenience is key in this. The fact that Uber integrated the payment option in the platform instead of redirecting you to a third party provider like iDeal or PayPall makes the experience for new user .

“Another Uber driver in Oslo ones told me during conversation that he was still trying to figure out how to get the passenger a coffee in the morning, but was of course challenged by facts that it should be warm and there are lots of variations in coffee taste.

 

In addition to governance, there are a number of other aspects that are important to consider like your data strategy. Data about participants, transactions, behavior, likes and needs etc. One of my experiences is that more traditional companies need to understand that data is the currency on the platform. In order to grow and keep attracting vendors, users, agents etc. you need to let them have access to data in order to grow the pie. An agent that is curating in a large and diverse crowd of buyers and sellers on a platform needs access to data to be effective and add value. If you limit those crucial actors on the platform to activate the data, the lifetime of the platform will be shortened and network effects are unlikely to occur.  Finally, some words on the data platforms. Amazon, Google, Apple are all working on seemingly very nice and functional products like Alexa and Google Home. Ultimately these products are window dressing the real purpose: creating a direct channel to you, your home, your behavior, asks etc. A good example is Amazon selling Alexa at huge discounts during the recent Amazon prima Day to get into our homes and with that being the intermediary to the retail business. If you can order your groceries through Amazon, do you in the end really care where Amazon sources the products? I f the convenience is high enough and it removes a structural friction we will change our behavior. On the upside we have all seen that this comes in waves and is always somehow counterbalanced by going back to our roots that has been cultivated over the past hundreds of years.

[1] The Shift Index, https://www2.deloitte.com/us/en/pages/center-for-the-edge/topics/deloitte-shift-index-series.html

[2] The disappearance of these barriers manifests itself, among other things, by a strong degree of democratization (ease to gain access to certain resources), demonetization (the phenomenon that many traditional cases become relatively cheap and even free) and dematerialization (the disappearance of the importance of the material aspects)

[3] The growth we are referring to here is one that is based on convenience and is therefore not a winner-takes-it-all model